Segregated Funds Explained. 8 Benefits Of Segregated Funds
What are Segregated Funds Investments
Segregated Funds are like Mutual Funds but are offered through many Insurance Companies. Their legal name is an “Individual Variable Insurance Contract” or IVIC for short. The Insurance Company is the owner of the Segregated Fund Assets and essentially holds them in trust for IVIC owners. Under an IVIC, there is no requirement for the contract owner to submit any medical information or to undergo a medical examination. Segregated Funds can be held in an RRSP on a tax-deferred basis, TFSA or as a non-registered Fund. The main differences between Mutual Funds & Segregated Funds are the principal guarantee on maturity and on death, reset options and Creditor Protection.
Segregated Funds vs. Mutual Funds
Similarities:
- Pooling of assets of many individual Investors
- Generally redeemable when you request
- Investment Returns based on the investments in the fund
- Both invest in similar types of securities
- Flow through Income to Investors
What’s so special about Segregated Funds & why do many sophisticated Investors prefer them over Mutual Funds?
8 Benefits Of Segregated Funds
Segregated Funds have the following unique Characteristics:
- Maturity Guarantee
- Death Benefit Guarantee
- Reset Option (Market Gains can be locked in & Guaranteed)
- Creditor Protection
- Exemption or exclusion from probate when naming a beneficiary
- Privacy
- Lifetime Income guarantees & Income Credits/Bonuses
- Taxation Benefits
1. Maturity Guarantee
A maturity guarantee is a guarantee from the insurance company stating that on the maturity date (in most cases this is 10 years after the first deposit) the investor is entitled to receive the higher of:
- Market value of the segregated fund Investments
- Statutory minimum guarantee of 75% of the principal investment in the segregated fund
Although the statutory requirement is 75%, the actual percentage guarantee offered varies by insurer can also give maturity guarantees of 100% are common, depending on the type of fund chosen.
This feature makes Segregated Funds extremely popular with Investors worried about stock market volatility which can be extremely nerve-racking and stressful, as witnessed during the credit & sub-prime mortgage crisis and current market volatile time. No matter how poorly the stock market performs, the Segregated fund investor is assured that the principal may be guaranteed at a minimum of 75% and up to 100%.
2. Death Benefit Guarantee
The Insurance Company Guarantees to pay a death benefit to the policy beneficiary if the annuitant dies before the maturity date. Generally the death benefit is calculated as the higher of:
The Market Value of the segregated funds and the stated guarantee minimum amount (75% and up to 100%). Where there is a named beneficiary, other than the estate, on the death of the annuitant the death benefit of a segregated fund policy passes directly to the named beneficiary & is not included as part of the deceased’s estate for probate or estate tax purposes.
In comparison, the fair market value of the mutual fund account at death is included in the deceased’s estate for probate purposes. For Registered mutual fund accounts, such as a RRSP, RRIF or TFSA, the above applied unless the spouse or common-Law Partner is named the sole beneficiary and they transfer the account into their own RRSP or RRIF by Dec 31 of the year following the year of death. For a TFSA, the above will occur unless a successor holder has been named, in which case the successor holder becomes the new owner of the TFSA and its contents.
3. Reset Options (Market Gains can be locked in & Guaranteed)
Most Segregated Funds allow you to reset your benefit guarantees each year. If the market value of your segregated fund investments is higher than your net deposits, you can reset your maturity and death benefit guarantees based on the higher value.
4. Creditor Protection
Segregated Funds are creditor protected for registered and Non-registered Policies provided that the owner has a family class beneficiary. If the Segregated Fund policy is owned by a holding company, it is generally protected from creditors of the operating company.
5. Exemption or exclusion from probate when naming a beneficiary
Upon the death of the annuitant, the funds move to the beneficiary outside the estate. Therefore, they avoid probate, except in the case where the estate is the beneficiary. This can be huge savings where probate fees are concerned. Ontario’s probate tax is 1.5% of the value of the assets that make up the deceased’s estate. On an estate with assets of $1 Million, Ontario will levy probate taxes just under $15,000.
6. Privacy
A will is a public document & therefore anything flowing through your will is available to the public. A segregated fund policy is a contract between you and the Insurance company. Any amounts paid out by the Insurance company are generally known only to the two parties, and not disclosed to the general public. In this regard, policy owners can maintain the privacy of beneficiaries of any amounts paid out to them. Policyowners can reduce the chance of others finding out who the beneficiaries are and the amounts of the proceeds given.
7. Lifetime Income Guarantees & Income Credits/Bonuses
These guarantees are offered through various Life Insurance carriers that we represent and the bonuses/Income credits are based on a fixed or variable rate of return depending on interest rates (Approx. 3-5% bonus). Income credits accumulate to help you catch up financially towards achieving your retirement goals and allow you to take advantage of potentially rising interest rates.
By combining a segregated fund policy with lifetime income benefits, you will be guaranteed income for life as well as an Investment portfolio tailored to suit your needs. You can select from a variety of funds containing Equity Investments or Fixed income Investments. You can build your investments while receiving secure income payments regardless of what happens to the portfolio values.
8. Taxation Benefits
There are many benefits that come with investing, and one of the most beneficial is taxation. When you invest your money into certain types of investments, you can enjoy tax advantages that other forms of revenue may not offer. By understanding the tax implications of various investments, business owners can make more informed decisions about where to allocate their capital.
Let’s talk today at 1-888-256-8685 to help you get started saving now!
Learn more about Segregated Funds. Few questions and answers.
Segregated funds are investments that are designed specifically for investment under the insurance act. These types of accounts are often referred to as Individual Variable Insurance Contracts. You can use segregated funds to invest money for your RSSP, TFSA and non-registered money.
The government offers tax breaks and incentives for people who open these types of accounts. In addition, they offer many investment options that allow you to customize your portfolio how you want it with ETF or ESG-type funds and any other type of funds.
- You have complete control over your money
- Your money grows at a faster rate than traditional bank GIC accounts
- You don’t need to pay taxes on any interest earned with a TFSA account in a Segregated Fund
- You can withdraw your money whenever you choose.
- Your funds can have a guaranteed death benefit, be creditor proof and be set up to avoid Estate Tax
To start investing in a segregated fund, you’ll first need to open an account with an Insurer. Once you’ve opened an account, you’ll transfer money into the account using a direct deposit. Direct deposits are simply transfers of money that happen automatically each month.
Can call Glenn Stewart at 1-888-256-8685 to speak with an investment specialist.
There’s no limit on how much you can contribute to a segregated fund. However, if you open an RSP or TFSA account there are certain limits that you can deposit annually.
Yes! When you reach retirement age, you can take out your money and continue to invest it. If you are using segregated funds for your RSP, the year you turn age 71 you change it to a pension or RRIF. There are no minimum withdrawal requirements on a TFSA or non-registered segregated funds once you reach retirement age.
Note, there are several tax advantages to segregated Funds in estate planning and passing funds on to the next generation.
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Where can I find information about segregated funds?
You can call Glenn Stewart at 1-888-256-8685 to speak with an investment specialist.