Segregated  Funds An Overview

This is some information about investments called segregated funds and their extraordinary guarantees. Seg funds have been a part of the insurance industry for many years. However in the early days insurance agents were discouraged from getting involved in these funds because the focus was on selling whole life insurance. Seg funds were almost exclusively transactions between the company and large pension fund managers. They were available at that time to the general public but sales and advertising of these products were still not being aggresively pursued. In fact, up until 1997, occasional articles would show up in the financial sections of various newspapers describing segregated funds as little known but important investment vehicles. For some unknown reason, these funds just did not catch the eye of the public.

Things really changed in 1998 when Mutual fund companies jumped on the bandwagon to make arrangements with life insurance companies to create new segregated funds which can be aggresively marketed by the mutual funds agents. Since, under existing legislation, only life licensed brokers can legally sell these funds, mutual funds agents who sell them must also have a life insurance licence or they are in other words dual licenced.

It is our belief that investors are concerned about the low interest rates available in GICs, treasury bills and bonds and yet many don't want to give up the guarantees on their invested capital. In the past, such fixed income investments have been considered conservative, safe and secure. For the retired, they paid interest in regular instalments, providing a steady income. Inflation, however, erodes the value of fixed-income investments.

To continue relying on such investments with low rates of return, the retired person risks outliving their retirement fund. One needs to look beyond GICs to address the need for capital preservation, investment flexibility and income. The only way to do this is to diversify a significant part of your investments into equity investments such as segregated funds which will keep growing as long as you live.

Will Rogers once said, "It's not so much the return on my money that concerns me as much as the return of my money." These days, you should be concerned both about the return on your money and the return of your money.

By law, segregated funds have a 75% guarantee of original capital invested in the funds at maturity of the funds [at least 10 years from date of deposit] or death of the policyholder. This means that as long as the investor is able to maintain the investment for at least 10 years, 75% of the investment is protected against loss. On the other hand, should the investor die, the 75% guarantee is immediately invoked.
 

 In addition, any gains in your investment can be included in the 100% guarantees. Consideration for the use of segregated funds should be given if you have an rrsp, rrif or lif. They should also be considered for non-registered investments for adults and children alike. Seg funds also have a "reset" provision so that if your investment grows you can reset the guarantee to reflect that growth.  One tradeoff of this reset is that the guarantee time starts fresh again.

 This 75% to 100% return of original investment guarantee at maturity or death can be very important especially as one approaches maturity. As an example lets say a 55 year old started a plan with a 10 year maturity. At age 64 he deposits an additional sum of money. At age 65 he would be assured of getting his guaranteed principal back regardless of what the market did. 

The list below are features that may be offered, and some may differ, and some are optional. You really must read the Information Folder (like the prospectus in mutual funds) to see what the particular contract offers.

	Death Benefit Guarantee (There may be restrictions particularly with the new repackaged mutual funds)
	Maturity Guarantee - at least 75%, often 100%. Maturity can be 10 years from inception, or can vary depending upon whether or not it is a registered plan. There may be choices, and often you can reset the maturity date to lock in profits.
	Waiver of Premium - optional for regular contributions. Like a life insurance policy it will pay your premium (contribution) for you if you become disabled. There is an additional fee for this.
	Creditor Protection - There are restrictions to this, but this is why segregated funds are a good option for self-employed individuals, and corporate directors.
	Estate Planning Benefits - If you name a beneficiary, the funds avoid probate and the fees that go with probate.
	Distribution of Income - Mutual funds use a simple formula, of income per units that does not consider time in the fund. Some seg funds use a "fair formula" for distribution of income and pro-rate the distribution based on time in the fund. This solves the problem of buying into someone else's potential capital gain.