Segregated Funds & Investments
Segregated Funds are similar to Mutual Funds but are offered through many Insurance Companies. Their legal name is an ‘Individual Variable Insurance Contract’ or IVIC’s 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 generally no requirement for the contract owner to submit medical information or to undergo a medical examination. Segregated Funds can be held in an RRSP on a tax deferred basis or a non-registered. The main differences between Mutual Funds & Segregated Funds are the principal guarantee on maturity and on death, Reset options & Creditor Protection.
Segregated Funds vs. Mutual Funds
- Pooling of assets of many individual Investors
- Generally redeemable when you request
- Investment Returns based on the investments in the fund
- Both invest in fairly 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?
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
- Lifetime Income guarantees & Income Credits/Bonuses
- Taxation Benefits
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 company and maturity guarantees of 100% are very 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. 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%.
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 & 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. I 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 or RRIF, 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 & its contents.
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.
Segregated Funds are creditor protected for registered & 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.
Exemption or Exclusion from Probate
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.
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 & the Insurance company & any amounts paid out by the Insurance company are generally known only to the two parties, & not disclosed to the general public. In this regard, policyowners can maintain privacy of beneficiaries & any amounts paid out to them. Policyowners can reduce the chance of others finding out who the beneficiaries are & the amounts of the proceeds given.
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 & allow you to take advantage of potentially rising interest rates. By combining a segregated fund policy with the 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 & Fixed income Investments. You can build your investments while receiving secure income payments regardless of what happens to the portfolio values. Please see example below.
Example: Male age 40 invests $100,000 in a Segregated fund within an RRSP account or Non-Registered account. Based on moderate to moderate aggressive risk profile & a diversified investment portfolio from various funds, assuming a 7% annual rate of return & a fluctuating income credit rate between 2.83-4.67% for illustration purposes only. The investment time frame will be based on 31 years since the annuitant would like to transition to a RRIF at 71. At 72, the annuitant will start withdrawing money as pension income from his RRIF account. The total market value at that time will be $815,000. The income credits they receive will be approximately $473,000 for a total of $1,288,000 ($1.288 Million Dollars) to withdraw over their lifetime or approximately $76,000 of income for life. This is a difference of approximately 58% on the total value.The income credits for this illustration is based on the 10 year Canada Benchmark yield plus 0.5%.
A capital gain reported by the fund owner will result in an increased adjusted cost base (ACB) for tax purposes & will, therefore, reduce any capital gain or increase any capital loss on subsequent dispositions. This ensures there will not be double taxation of income. Net capital losses flow through to investors & are available to investors to offset capital gains from other sources. Income in a segregated fund is allocated on a time-weighted basis, except capital gains or losses which are allocated first to policyowners who disposed of unts throughout the year.
Portfolio & Investment Management
One of our qualified Advisors will Design a bulletproof portfolio for you based on your risk tolerance and time horizon. Your portfolio will be diversified from our various stable of Funds and will be actively managed and re-balanced when needed. Your portfolio will be carefully designed and evaluated accordingly based on your investment objectives & retirement goals. A full & comprehensive Financial Needs Analysis will be completed to help us better understand your goals & overall objectives. Most of the above mentioned guarantees would be included with your investments. Leveraged Loans/Investment Loans will also be available for those who qualify. Call us today to speak with one of our experienced Advisors toll free at 1-888-968-9188 & get started!