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Segregated Funds - The Basics

June 30, 2021

Segregated funds are often described as mutual funds with a guarantee. Although they function like mutual funds, they are actually annuity contracts with mutual fund-like characteristics. Similar to mutual funds, segregated funds have a market-based investment component. With segregated funds, a large pool of money belonging to many people is invested in stocks, bonds or other securities—all with the goal of increasing the value of the entire pool. An investor can choose to invest in a segregated fund based on its investment objective and product terms.

However, because life insurance companies issue segregated funds, there is a guarantee attached to the fund that protects the investor's principal from sudden market declines. In this way, you can think of segregated funds as a mutual fund with a safety net.

For investors, segregated fund contracts provide a number of unique benefits:

Guaranteed principal

Segregated funds can guarantee 75 to 100 per cent of your principal investment so long as you hold your fund for a set period of time (typically 10 years).

Guaranteed death benefit

Depending on the contract, segregated funds allow beneficiaries to receive 75 to 100 per cent of contributions should the owner die before the contract matures.

Creditor protection

In many cases, money invested in segregated fund contracts can be protected from creditor seizures. This provides added protection for beneficiaries in the event that the account holder encounters financial difficulties or bankruptcy.

Other Segregated Fund Considerations to Keep in Mind

  • Segregated funds vary based on their investment objective and product terms.
  • Due to their guarantee, segregated fund fees tend to be higher than mutual funds.
  • In order to take full advantage of the guarantee, investors must keep their money in the fund until the maturity date. Cashing out means investors will only receive the market value of the investment minus any withdrawal fees.

Be Prepared

Segregated funds are a popular investment option, but can be complex and difficult to understand. Contact us today to learn more about segregated funds and other investment strategies.