What are Canadian segregated funds & how do they work?

4 min read | January 26, 2022 11:46 AM AEDT | By Team Kalkine Media

What are Canadian segregated funds & how do they work? — Image source: © 2022 Kalkine Media®

What is a segregated fund?

A segregated fund combines various features of a mutual fund and provides guarantees, advantages, and life insurance benefits through an insurance company. It is a type of insurance product that is developed by insurance companies. Most Canadian investors use this fund to get investing benefits.

It is a type of investment vehicle that helps in handling variable annuity insurance products. Segregated funds are provided by life insurance firms that offer a death benefit and a maturity benefit guarantee.

Also read: How can you invest your money in a mutual fund? A complete guide

Understanding segregated funds

It is a contract between investors and life insurance firms that invest in underlying assets. It is found in Canada and is majorly provided by Canadian insurance firms.

The insurance companies hold these funds in separate accounts. The segregated funds are known as structured contracts that are not available for listing in the public market and do not provide ownership options.

If the market fails to grow or you lose money, then this fund gives a guarantee to get back 75 per cent to 100 per cent of the principal investment. An investor may buy segregated funds from insurance companies that invest the money in stocks, bonds, and other securities through a fund manager like a mutual fund.

To get the guaranteed benefit, an investor needs to hold the investment for a certain period, usually for 10 years, and needs to pay higher fees for getting insurance protection.

Also read: What is market capitalization & how it can help investors?

Examples:

Sun Life Financial Inc (TSX:SLF) and Royal Bank of Canada (TSX:RY) are insurance firms that offer segregated funds to Canadians. Sun Life provides segregated fund contracts through Sun GIF Solutions and Sun Lifetime Advantage GIF options.

The Royal Bank of Canada provides segregated funds to investors through its Invest Series, Series 1, and Series 2. All these series include maturity guarantee and death benefit guarantee.

Advantages and disadvantages of segregated funds.

How segregated funds work

It is a type of contract that preserves your investment up to a specified maturity date. The contract is held and operated by life insurance firms that manage ownership of your deposit after you’ve entered a contract.

It provides a 75 per cent to 100 per cent guaranteed return of your initial investment at the end of the contract. To get a 100 per cent principal guarantee, you need to pay higher insurance protection costs. A fund that gives a 75 per cent guarantee will be cheaper.

Every segregated fund has a defined contract, normally for 10 years or 15 years term. After signing the contract, the insurance firm manages the contract until it ends.

If you withdraw before the contract ends, then you get your underlying investments according to the current market value which could be lesser than the initial investment.

Segregated funds provide a death benefit to a person who dies unexpectedly before their contract ends. The death benefit provides the segregated fund to beneficiaries of the dead person.

After the death confirmation, the insurance company will provide either 75 per cent to 100 per cent of the initial investment or the market value of the deposit, whichever is higher.

Bottom line

Segregated funds are ideal for investors who don’t want to take a risk or lose money in a volatile market. The provide a guarantee with the opportunity for benefits.

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