Imagine the scenario where you could make an investment that has the opportunity for growth in the financial markets and comes with a guarantee that it won’t lose money. No, this is not the stuff of dreams. In the real world it is called a segregated fund and you can get one if you are a Canadian citizen.
Now, that we’re all excited lets get right to it. Segregated funds are professionally managed portfolios provided by insurance companies that have a guaranteed return on maturity or upon the death of the investor. The strange name is based on the fact that these funds are not part of the insurance company’s assets but rather from a separate pool of money dedicated to paying out the holders of the policy.
These funds are similar to mutual funds because they are professionally managed, offer diversification, have a variety of different types of focus to choose from, the profits are taxed unless these funds are held in a retirement account. The big difference is that segregated funds are variable annity contracts provided by life insurance companies that usually guarantee a return of at the minimum 75% if held over a period of at the minimum 10 years.
Besides the guaranteed return there are a few other benefits of segregated funds:
1) Reset options – Most segregated funds have the option of ‘resetting’ the investment amount to include the gains made in the portfolio. Their usually a maximum number of increases permitted depending on the contract and also the increase in the amount could extend the date of maturity of the investment.
2) Protection from creditors – As long as the annuity contract has existed for at the minimum two years, and estate taxes are not owed, the investment held in segregated funds is not easy to reach by creditors. already if the account holder files for bankruptcy or faces other financial difficulty the beneficiaries of the life insurance have first rights to the annuity.
3) Liquidity – Investors can usually withdraw upto 10% of the investment amount each year without a penalty. If these funds are held in retirement accounts then this figure increases to 20%.
4) Estate Planning – the time of action of wealth move is faster and cheaper because the investment in segragated funds is not unprotected to probate. The funds go directly to the account holder or the beneficiary.
As expected there a few disadvantages associated with segregated funds:
1) The cost of investing is higher than that of mutual funds.
2) Early redemptions above the limits usually have penalties upto 6% in the first year but they decline by 1% in later years to 0%.
3) If you decide to change the area of investment there can be additional fees and there is a limit on the number of times you can begin such transfers.
Overall, segregated funds provide a great investment opportunity for all with room for growth and protection from losses.