What The Heck is a Seg Fund?

In today’s economic environment it is important to understand your investment options and alternatives. When looking at investments you need to determine your goals and objectives as an investor. 

Asset allocation is at the core of many investment strategies. It helps establish the recommended mix of investments by appointing a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon. 

However, as we have seen over the last few years in spite of sound investment strategies, exposure to markets during an economic downturn can still leave your portfolios vulnerable and open to significant loss. As an investor nears retirement, safety and security become a higher priority- this is why so many people are choosing to invest in Segregated Funds/GIFs.

Segregated funds were introduced into the marketplace over 50 years ago but have had very little exposure in the industry. Segregated funds or “seg funds” are investment products, similar to mutual funds, that are offered by life insurance companies.

Should you consider Segregated Funds?

Do you want to avoid probate? 
Do you want guarantees on your investments? 
Do you want to protect your principal investment? 
Is creditor protection important to you?
Do you want an easy estate transfer of wealth? 

 

If you think segregated funds might be a good solution for you and your family; please read on.
Segregated Fund Mutual Funds
Overview Your net premiums are invested in the segregated fund of an insurer which, in turn, invests in stocks, bonds and money market investments. Segregated Funds are insurance products. Money is pooled and invested on behalf of unit holders in stocks, bonds and money market investments.
Regulated By Provincial Life Insurance Acts Securities Legislation
Investment Growth Potential Yes Yes
Investment Diversification Yes Yes
Financial Protection At death and maturity, premiums minus withdrawals prorated are usually guaranteed between 75% and 100% There are no guarantees on investment performance.

No limit on potential loss.

Death Benefit The named beneficiary will receive the greater of, either the guaranteed death benefit or the market value of the policy. The estate or beneficiary will receive the market value of the mutual fund. There are no guaranteed minimums.
Probate Protection At death, the named beneficiary will receive proceeds avoiding the estate administrative process and the cost of probate. At death, proceeds are an asset of the estate and are subject to the estate administrative process and legal fees. It may take some time for the estate to distribute the funds. 
Creditor Protection Designation in favour of a spouse, parent, child or grandchild may result in moneys being exempt from seizure. This is referred to as “creditor protection” No. Assets are open to claims from creditors.
RRSP/RRIF Eligible Yes Yes
TFSA Eligible Yes Yes

Taxation Implications for Non-Registered Investments

You are only taxed on the income you actually receive. Taxation is based on how long you own the Segregated Fund units within the income period.

e.g. if you buy units one day before the fixed date, you are only assessed for the one day’s income.

You can use the capital losses to offset the capital gains from other sources.

For accounting purposes, acquisition fees are excluded from the Adjusted Cost Base (ACB) and treated separately.

There is the potential to be taxed on income never received. Taxation is based on who owns the mutual fund units on a given date at the end of the income period.

e.g. if you buy units one day before the end date, you are assessed for all income earned in that period, even though you did not benefit from that income.

Capital losses must be carried forward and are not allocated to you, the unit holders.

Acquisition fees are included in the Adjusted Cost Base (ACB).

Under what circumstances might these be more suitable? Non-Registered and Registered Funds. Investors approaching or in retirement.

Investors who are more risk averse and prefer security and guarantees.

Business Owners who want creditor protection.

Non-Registered and Registered Funds.

Investors who want a wide variety of specialized funds.

Investors who are willing to give up guarantees for potential increased returns.

 

 

Insuring Your Capital

By law, a life insurance company is required to build in added protection to their investment products. Unlike mutual funds, segregated fund policies guarantee that most, if not all of the initial investment is protected at maturity or in the event of death. Depending on the life insurance company and the segregated fund selected, the guarantee will typically vary from 75% to 100% protection on your capital investment. 

Resets

If your investment has gained in value, you may have the options to “reset” its starting value, locking in the gains you’ve earned.  Ie. you have the option to periodically “lock-in” (reset) the protection on principal when the market value has increased above the initial investment or last reset value (whichever is higher).

Estate Bypass

With segregated funds, the death benefit is paid directly to your named beneficiary rather than to your estate. This means that the value of your segregated fund investments may bypass probate, a costly and lengthy process. So, in addition to receiving more funds,  your named beneficiary will receive the proceeds faster. 

This chart compares the net estate value between a traditional investment portfolio and a segregated fund/GIF.

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