Segregated Funds are investment funds managed and/or distributed by life insurance companies. They are similar to mutual funds but offer some distinct benefits and advantages, including:
A 75% to 100% return of original investment guarantee at maturity or death. This can be very important especially as the fund approaches maturity;
Privacy. To protect your privacy, utilize a segregated fund or life insurance contract. Upon death the proceeds flow to your beneficiary or beneficiaries in a confidential manner, outside your will and bypassing the estate;
Potential creditor protection. Contributions to a non-registered investment with an insurance company are generally "creditor proof" when a regular pattern of investing is established. When an investment is held in segregation, funds owned by the policyowner cannot be seized by creditors (i.e. if the client owns a business or corporation, their investments in Segregated Funds will be immune to creditors) should financial tragedy strike;
No probate fees. One can name a beneficiary and have proceeds paid directly to your beneficiary, thus bypassing the will.
Segregated Funds vs. Mutual Funds
Segregated Funds is money pooled and invested on behalf of unit holders in securities such as stocks, bonds, equities and money market investments, within a life insurance company's contract.
Money is pooled and invested on behalf of unit holders in securities such as stocks, bonds, equities and money market investments.
Provincial & Federal Life Insurance Acts
Capital Growth Potential
Unit Value Daily Tracking
At death and maturity, premiums minus withdrawals are usually guaranteed, between 75% and 100%.
No guarantees on investment performance. Theoretically, you could lose everything.
Beneficiaries receive either the guaranteed death benefit or the market value depending on which is greater.
The estate or beneficiaries 2 will get the market value only – there are no guaranteed minimums.
At death, proceeds can be paid directly to a named beneficiary, avoiding the estate admin process, and the cost of probate fees. Designations in favour of a parent, spouse, child or grandchild may result in the insurance money being exempt from seizure. This is sometimes referred to as "creditor protection".
At death, proceeds are an asset of the estate and are subject to the estate, admin process and legal fees. It could be some time before the estate can distribute the mutual funds.
The money cannot have been deposited as:
- Part of a fraudulent conveyance (transferring money to keep it out of reach of existing creditors).
- Within a specific time period before bankruptcy
The money cannot have been deposited as:
- No protection against the claims of creditors.
Yes - Only one company though
Taxation Implications for non-registered investments:
You are only taxed on the income you actually receive. Taxation is based on how long you own the Segregated Fund units within the income period.
- E.g. if you buy units one day before the fixed date, you are only assessed for one day's income. The unit seller is assessed for income made before the end date.
You can use capital losses to offset capital gains from other sources. For accounting purposes, acquisition fees are excluded from the adjusted cost base and treated separately.
You could be taxed on income you never received. Taxation is based on who owns the mutual fund units on a given date at the end of the income period.
- E.g. if you buy units one day before the end date, you are assessed for all income earned in that period, even though you did not benefit from that income.
Capital losses must be carried forward by the fund and are not allocated to you, the unit holders.Acquisition fees are included in the adjusted cost base.
Under what circumstances might these be more suitable:
- Non-registered or registered funds
- Investors approaching retirement
- Investors who like the security of guarantees
- Business owners who want creditor protection.
- Non-registered and registered funds
- Investors who want a wide variety of specialized fund choices in their investments
- Investors willing to give up guarantees for potential increased returns.
Investment and Retirement Planning are an integral part of over-all Financial Planning. Since these plans are as unique as each individual, we recommend that you meet with one of our financial professionals to review your portfolio and tailor a plan that best suits your style.
Here are a few tips to assist you in achieving your financial goals:
- Develop and write a financial plan with your representative and try your best to follow it
- Define your short, medium and long term goals
- Create a monthly budget, watch your cash flow and know where you are at with your net worth
- Pay yourself first by utilizing a monthly systematic investment plan
- Know your risk profile before investing so that your investment fits your own needs and tolerance
- Set investment return goals and periodically review with your representative the performance of your portfolio and the investment managers
- Contribute to RRSP's and RESP's to maximize your tax deductions and to receive your government grants
- Receive an analysis on whether you should purchase RRSP's vs. paying down your mortgage
- Set up an emergency fund of at least 3 months income
- Be sure to have adequate life, disability and critical illness insurance as well as a current will
- Consider drafting a power of attorney
- Interview a few financial professionals before committing your future to one
Contact the financial experts at Macnaughton & Ward Financial Services for a no obligation consultation of your financial affairs