Segregated Funds—often called Seg Funds—have grown in popularity in recent years, and for good reason. These investment products provide several features that traditional mutual funds do not, making them an attractive option for investors looking for both growth potential and added protection.
To understand Segregated Funds, it helps to first look at mutual funds. A mutual fund pools money from many investors to purchase a diversified mix of stocks and fixed-income securities such as bonds. Each fund follows a specific investment objective—some focus on global markets, while others concentrate on North American equities.
Segregated Funds invest in similar types of underlying assets and are managed by professional portfolio managers. When you purchase a Seg Fund, you own units of the overall fund and are exposed to the same market performance as other investors in that fund.
So, what makes Segregated Funds different?
A simple way to think of them is as mutual funds with built-in insurance protection. This additional layer of security is what sets them apart.
Key advantages often include:
- A maturity guarantee
- A death benefit guarantee
- The ability to bypass probate and estate fees
- Potential protection from creditors
Maturity Guarantee
The maturity guarantee helps protect investors if market performance falls short over time. Depending on the contract, this guarantee is usually set at 75% or 100% of the original investment, provided the policy is held until maturity—often 10 to 15 years.
For example:
Susan, age 55, invests $100,000 into a Segregated Fund with a 15-year maturity guarantee. If markets perform poorly and the value of her investment declines, she would still be entitled to withdraw at least $100,000 when she turns 70—even if the market value at that time is lower.
This feature can be particularly reassuring for investors approaching retirement.
Death Benefit Guarantee
Similar to the maturity guarantee, Segregated Funds also include a death benefit guarantee—typically 75% or 100% of the original deposit. The key difference is that the death benefit applies from the very first day of the contract.
Using Susan’s example again:
Susan invests $100,000. Shortly afterward, markets decline and the value of her investment drops to $90,000. If she were to pass away at that time, her beneficiary could still receive $100,000, despite the market loss.
For couples nearing retirement, this can add another layer of confidence to long-term financial planning.
Bypassing Probate and Estate Fees
Because Segregated Funds are issued by life insurance companies, they fall under Canadian life insurance legislation. As with traditional life insurance policies, you can name beneficiaries directly on your Seg Fund contract.
This means the proceeds typically pass outside of your estate, allowing funds to reach your beneficiaries more quickly and potentially avoiding probate fees and estate administration costs.
Many Canadians underestimate the impact of estate settlement costs. With one of the largest wealth transfers in history approaching, thoughtful estate planning has never been more important.
Protection from Creditors
In many situations, Segregated Funds may also offer protection from creditors. Since they are structured as insurance contracts, these investments are often shielded from legal claims—provided certain conditions are met and beneficiaries are properly designated.
However, this protection is not absolute. For example, moving money into a Segregated Fund when legal action is already anticipated may not provide protection.
Learn More About Segregated Funds
There are many reasons investors choose Segregated Funds as part of their financial strategy. If you are unsure whether Segregated Funds are right for you—or would like to explore how they could fit into your overall plan—contact Aram Insurance today. One of our representatives would be happy to provide guidance and answer your questions.