Segregated funds are like mutual funds but different. They are market based investments which offer professional management, diversification and growth from exposure to stocks and other assets like mutual funds. However, while they may act like mutual funds, segregated funds are insurance products offered by insurance companies and so they come with a built-in insurance contract which offer valuable and different benefits as compared to mutual funds. Here are 6 benefits of segregated funds:
- Maturity guarantees: Segregated funds are issued with a maturity date. On this date, the clients is guaranteed to receive at minimum, either 75-100% of the market value or the market value The maturity period is typically 10 years
- Death benefit guarantees: Segregated funds offer either the market value of the fund or the minimum guaranteed 75-100% of the principal invested. .
- Resets: Some types of segregated funds often offer reset values so if the fund value rises then the guaranteed amount can be reset at the higher value to lock in market gains. Resets could extend the length of time before you are able to the maturity benefit guarantee, usually 15 years or so from the date of reset
- Potential creditor protection: Because segregated funds are insurance products and have named beneficiaries, they are potentially protected from creditor claims in the event of bankruptcy or lawsuit. As a result, segregated funds are often popular with business owners and self-employed professionals
- Estate preservation: Segregated funds have designated beneficiaries which enable them to bypass distribution of the estate and be paid directly to that beneficiary. By doing so, they do not form part of the deceased’s estate and escape the probate process and probate fees.
- Estate privacy: Segregated funds offer privacy not offered by mutual funds. When a will is probated, it becomes a publicly available record. Because segregated funds provide for a named beneficiary, they do not form part of the estate and so such proceeds are paid directly to beneficiaries quickly and privately
Not for everyone but certainly ideal for some
Due to the insurance contract element of segregated funds they are more expensive than mutual funds. However, in recent years the cost of segregated funds have decreased to typically 25 basis points over the management expense ratio for mutual funds. Segregated funds have also evolved in recent years with insurers adding more features like payout and lifetime income guarantees and annuity options. Whether or not it is worth paying for the added cost of segregated funds will depend on your circumstances. Maturity and death guarantees for downside protection but with upside potential may be ideal for those investors who are closer to retirement or fearful of lower risk tolerance. Creditor protection can also certainly be worth paying the additional cost for segregated funds.
Estate planning features can go beyond avoiding probate; it’s the most efficient and effective way to do an estate transfer when dealing with non-registered investments. Given the increase in the number of estate disputes I think this is a growth area for segregated funds. When you name a beneficiary in a segregated fund contract it reduces the risk of that beneficiary NOT getting the inheritance they are entitled to. The added features that are available in the form of annuity contracts can be pre-written into the contract which in some circumtances can reduce the need for a trust.
Overall, there's a lot to like about segregated funds but as always, it’s most helpful to talk with a financial advisor to compare the options and decide what’s best for your personal circumstance. When building your financial plan, it’s important to couple asset allocation with product allocation and diversification. Please reach out and connect if you would like to connect.