Segregated Funds

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How does a segregated fund work?

Insurance companies offer investment products known as segregated funds. These investments share similarities with mutual funds, as both involve a collection of funds that clients invest in, managed by professional fund managers.

Segregated funds come with additional features not found in mutual funds, such as a death benefit and, in certain cases, a guaranteed base income. When a segregated fund policy is purchased with non-registered funds, investors can designate beneficiaries. This allows the funds to be directly paid to loved ones upon the investor’s passing, bypassing probate fees.

One advantage of segregated funds is that individual insurance contracts purchased through them are invested in underlying assets like mutual funds, leading to potential appreciation over time. While there is a risk of funds incurring losses, segregated funds include a guarantee to protect a portion of the investment. Furthermore, even if the underlying fund experiences losses, investors may still recover some or all of their principal investment with segregated funds.

Are segregated funds as safe as equity funds?

Certainly, segregated fund investments are sheltered from market disruptions owing to their inherent nature and guarantee. In contrast, a mutual fund or equity fund policy might outperform a segregated fund or undergo fluctuations based on market conditions.

What is the difference between a mutual fund and a segregated fund?

In contrast to mutual funds, segregated funds provide insurance benefits and guarantees. While your contributions are assured, they do come with higher fees and are generally less flexible than mutual funds. Segregated funds are characterized by lower volatility and very low risk. It’s essential to remember that in all investments, you still hold the shares, and it’s the value that fluctuates.

In the event that the value of your fund decreases, it’s crucial not to panic and withdraw hastily. The principle of buying low and selling high applies. Always consult with your Assurance broker before making any decisions about moving your investments. Mutual funds, while offering greater potential gains, also carry the added risk of potential losses on your investment. The typical segregated fund comprises a portfolio managed by a life insurance company like Manulife, Empire Life, or Industrial Alliance.

Benefits of working with an experienced Assurance associate

In the industry, a crucially important practice involves an experienced and properly licensed associate guiding clients through a comprehensive financial needs analysis to ensure no details are overlooked. At Assurance, we go beyond by offering additional products that are interconnected with financial planning, ensuring our clients can benefit from a well-rounded financial plan for the future.

Our Assurance associates are equipped to assist you in planning for retirement, securing a life insurance policy from a reputable company, identifying opportunities for savings, optimizing the performance and value of your investment options, and even exploring specialty funds for investment. With our extensive resources and fund options, we can help you manage risk and secure coverage. Importantly, our services come with no fees, and you can trust our associates to help you construct a robust plan for your retirement and beyond. The choice of the right insurance company can significantly impact an investor, not only in life insurance but also in other financial services. We strongly recommend reaching out to an Assurance Group Insurance associate today!

FAQ

Are segregated funds guaranteed?

Indeed, a segregated fund investment comes with a guarantee covering 75% to 100% of your contribution, ensuring the preservation of your hard-earned investment.

What are the benefits of segregated funds?

With guaranteed funds, you safeguard your investment from complete loss, irrespective of market volatility. In the event of death, your investment can seamlessly transfer to your beneficiary without incurring probate expenses. The option to lock in your gains, known as a reset, is available—your agent can provide further clarification. Additionally, there is creditor protection for your investment in the face of bankruptcy or potential lawsuits, offering a valuable benefit in the face of uncertain future circumstances.

Can you withdraw from segregated funds?

Early withdrawal from a segregated fund carries stringent penalties, and while it is possible, it is not advisable. Similar penalties may apply to premature withdrawals from savings, coupled with potential capital gains implications. Depending on the fund’s value, this could result in significant tax obligations. It is strongly recommended to consult with your Assurance Expert before making any decisions to withdraw funds, ensuring that you choose the best course of action based on your specific needs and circumstances.

How do I buy segregated funds in Canada?

Initiate a conversation with an Assurance Brokers Group Associate today to commence a thorough financial needs analysis. Your Assurance associate will assist in identifying your needs and goals, and will strategically invest in the most suitable products for your specific situation. Assurance is well-equipped to guide you in assessing whether segregated funds align with your optimal investment strategy, and we’ll handle interactions with insurance companies on your behalf.

What happens to segregated funds when you die?

Following your passing, the segregated fund includes a guaranteed death benefit, passing on to your beneficiaries. This feature can provide protection against probate fees, distinguishing it from a mutual fund.

Do beneficiaries of a segregated fund pay income tax?

In Canada, beneficiaries of a segregated fund investment are not subject to taxes or fees upon the death of the investor. The deemed disposition (capital gain) is applicable to the estate. However, in the case of joint ownership of a Seg fund, there is no deemed disposition upon the death of a joint owner. It’s important to note that only an RRSP seg fund rolled to a spouse does not incur a deemed disposition upon the owner’s death.

How are segregated funds taxed in Canada?

Although your tax advisor can provide more comprehensive information, it’s worth noting that only 50% of the realized capital gains from the fund are reported for tax purposes. Additionally, eligible dividends are taxed on a grossed-up value equivalent to 38% of the actual dividend amount, with an enhanced dividend tax credit of approximately 25.02% (combined federal-Ontario 2019 rate) available for the grossed-up amount.