What are segregated fund policies?
A segregated fund policy (also known as a guaranteed investment fund) is an insurance contract issued by a life insurance company such as Canada Life. It features 2 parts:
- A pooled investment (similar to a mutual fund) managed by experts, that helps you diversify your savings and protect them from market dips.
- An insurance policy that guarantees 75% to 100% of the money you invest. You pay an additional fee for this guarantee.
Segregated fund policies usually have 10 to 15-year terms, with an option to regularly reset the term to lock-in investment gains.
How segregated fund policies work
Guarantee levels and options
Segregated fund policies allow you to choose guarantees for maturity and death benefits to help ensure your savings remain protected. This means when your policy reaches its maturity date or when you pass away, if your investment is worth less than its guaranteed value, the insurance protection will top you up. Naturally, it will be proportionally reduced by any withdrawals.
Canada Life offers 3 options to choose from based on your risk tolerance needs:
- 75/75 guarantee policy – 75% maturity and death benefit guarantees
- 75/100 guarantee policy – 75% maturity guarantee and up to 100% death benefit guarantees
- 100/100 guarantee policy – 100% maturity and death benefit guarantees
Withdrawal rules
To get the guarantee, you must keep your money in the segregated fund policy until the maturity date (usually 10 years). If you cash out your investment before the maturity date, you’ll receive the investment’s current market value, which may be more or less than what you invested originally. Plus, you may have to pay a penalty.
Benefits of segregated fund policies
Guaranteed savings protection
Segregated fund policies give you growth potential while protecting you with maturity and death benefit guarantees. These guarantees protect part or all your initial investment; when you reach your maturity guarantee date or pass away, if your investment is worth less than its original value, the insurance protection will top you up to your chosen percentage. Naturally, it will be proportionally reduced by any withdrawals.
The ability to lock-in investment gains
If the value of your investment increases, some segregated fund policies allow you “reset” the guaranteed amount to this higher value. However, this will also reset the term of your segregated fund policy (usually 10 years from date of reset).
A seamless way to pass on your wealth
In the event of your death, the person you choose to settle your affairs could find the process stressful. Segregated fund policies offer a simple and straightforward way to pass on your money. Unlike some investments, the death benefit from your segregated fund policy will go directly to your beneficiaries and won’t flow through your estate. This could be faster, less expensive and less stressful than other options. If the policy has a designated beneficiary, the way you choose to leave your money, and to whom, is private.
Potential creditor protection
Your investments could be protected even if you face unexpected lawsuits or bankruptcy. With such protection, after your passing, the death benefit will go to your beneficiaries, not creditors.
Creditor protection depends on court decisions and applicable legislation, which can be subject to change and can vary from each province; it can never be guaranteed. Talk to your lawyer to find out more about the potential for creditor protection for your specific situation.
Privacy
Your designated beneficiaries (if you decide to have them) are a private matter and won’t be disclosed.
Note: In Saskatchewan, executors must disclose all known life insurance policies owned by the deceased, including segregated fund policies. They must list the insurance company, policy number, designated beneficiaries and the value at the date of death.
Segregated fund policy myths
They’re only for retirees
Though their principal protection and estate planning benefits make them a great choice for those close to or in retirement, they also offer growth potential through a variety of asset classes, including equities making them suitable for a wide range of clients including risk-conscious younger investors.
They lack investment flexibility
More comprehensive segregated fund line-ups now include several management styles, broader geographic coverages and most major asset classes. Investors can build robust, diversified portfolios that can adapt to various market conditions.
They cost too much
Segregated fund fees are a valid consideration but consider the added value they provide including maturity and death benefit guarantees and the opportunity to lock in investment growth through regular resets.
Where can you hold segregated funds?
You can hold segregated funds in:
- Registered retirement savings plan (RRSP), spousal RRSP and locked-in RRSP
- Tax-free savings account (TFSA)
- Registered retirement income fund (RRIF), spousal RRIF, life income fund (LIF), locked-in retirement account (LIRA), restricted locked-in savings plan (RLSP), prescribed registered retirement income fund (PRRIF), restricted life income fund (RLIF), locked-in retirement income fund (LRIF)
- Non-registered plans
- Annuities
Depending on the plan or account, there may be age restrictions for the annuitant. Consult with your advisor for specific details.
Who should consider segregated fund policies?
- Conservative investors looking for a balance of growth potential and security, especially retirees or people nearing retirement who want to protect their capital and ensure a steady income stream.
- Blended families and seniors looking to protect their estate, secure a smooth estate transition and avoid unnecessary fees.
- Business owners who wish to use the creditor protection feature of segregated fund policies to help separate personal savings from professional liabilities.
About Canada Life segregated funds
Canada Life offers more ways to invest in segregated funds, including managed portfolios and ETF portfolios.
Discover how Canada Life segregated funds ranked #1 in 2023 for earning the most FundGrade A+ awards, providing protection, privacy and diversification.