Investment Growth with Insurance Contract Features

Segregated funds are professionally managed investments offered through life insurance companies. Like mutual funds, they invest in portfolios that may include equities, fixed-income investments and other securities.

What makes segregated funds different is that they are held within an individual insurance contract, which can provide additional features such as maturity and death benefit guarantees, beneficiary designations and potential estate-planning and creditor-protection benefits.

These features can make segregated funds worth considering as part of a broader investment, retirement or estate-planning strategy.

Key Features of Segregated Funds

Maturity and Death Benefit Guarantees

Segregated fund contracts generally provide guarantees of 75% or 100% of eligible deposits, depending on the contract and guarantee selected.

Guarantees may apply at the contract's maturity date and upon the death of the annuitant, subject to the terms of the contract and adjustments for withdrawals.

Some contracts may also provide opportunities to reset guaranteed values.

Because contract features vary considerably between insurers and products, it is important to understand the specific guarantees, maturity periods, fees and conditions before investing.

Estate-Planning Advantages

One of the distinguishing features of a segregated fund contract is the ability to designate a beneficiary.

Where an eligible beneficiary has been named, proceeds may be paid directly to the beneficiary following the death of the annuitant rather than being distributed through the estate, subject to applicable law and the terms of the contract.

This may:

• simplify and accelerate the transfer of proceeds;
• help avoid probate or estate administration costs on those proceeds; and
• provide greater privacy than assets distributed through an estate.

Beneficiary designations should be reviewed periodically, particularly following major life events.

Potential Creditor Protection

Because segregated funds are insurance contracts, they may provide creditor-protection benefits in certain circumstances.

Whether creditor protection applies depends on factors such as the beneficiary designation, ownership structure, applicable provincial legislation and the circumstances under which contributions were made.

Creditor protection should not be assumed, and transactions intended to defeat existing creditors may not receive protection.

Business owners and professionals concerned about creditor exposure should obtain appropriate legal advice when incorporating these considerations into their financial planning.

Professional Investment Management

Segregated funds provide access to professionally managed portfolios across a range of investment objectives and asset classes.

Depending on the insurance company and contract, investment options may include:

• Canadian and global equities;
• fixed-income investments;
• balanced portfolios;
• income-oriented funds;
• asset-allocation portfolios; and
• other specialized investment strategies.

The appropriate investment selection should reflect your objectives, investment time horizon and comfort with investment risk.

Registered and Non-Registered Investing

Segregated fund contracts may be available for a variety of registered and non-registered accounts, depending on the insurer and product.

These may include:

• RRSPs;
• RRIFs;
• TFSAs;
• LIRAs and LIFs; and
• non-registered investments.

Tax treatment depends on the type of account and individual circumstances.

Segregated Funds and Retirement Planning

For clients approaching or living in retirement, segregated funds may provide a way to maintain exposure to investment markets while incorporating certain insurance guarantees.

Some contracts may also offer income-oriented features or guaranteed-income options.

These features vary significantly between products, so investment selection should consider both the underlying investments and the terms of the insurance contract.

Segregated Funds vs. Mutual Funds

Segregated funds and mutual funds can both provide professionally managed and diversified investment portfolios, but their legal structures and features differ.

Segregated fund contracts can have higher costs than comparable investment funds because of the insurance guarantees and other contract features they provide. The appropriate choice depends on whether those additional features are valuable for your particular circumstances.

Are Segregated Funds Right for You?

Segregated funds may be worth considering if you:

• want exposure to professionally managed investments;
• value maturity or death benefit guarantees;
• are approaching or living in retirement;
• want to incorporate beneficiary planning into your investments;
• are considering estate-planning strategies;
• are a business owner or professional concerned about potential creditor exposure; or
• want to combine investment management with certain insurance-contract features.

They aren't necessarily appropriate for every investor. Costs, guarantees, investment options, liquidity, time horizon and contract conditions should all be considered.

Review Your Investment Options

Your investment needs can change over time. A review can help determine whether segregated funds, guaranteed investments or other investment solutions are appropriate for your objectives.

Talk to your MWFS Representative about your investment goals and available options.

Segregated fund contracts are issued by life insurance companies. Any amount allocated to a segregated fund is invested at the risk of the contractholder and may increase or decrease in value. Guarantees are subject to the terms and conditions of the applicable insurance contract, including maturity dates and adjustments for withdrawals. Creditor protection and estate-planning outcomes depend on individual circumstances and applicable legislation. This information is provided for general educational purposes and is not intended as legal, tax or investment advice.