Segregated funds, or Individual Variable Insurance Contracts (IVICs), are pools of investments, similar to mutual funds, but sold as an insurance policy. They offer full or partial principal guarantees if held until they mature or until the fund holder passes away. Therefore, they can be useful in estate planning.
Segregated funds also offer protection from creditors. This means that if you go bankrupt or fail to pay your debts, creditors cannot touch the money in this fund, unless you have opened this fund in anticipation of going bankrupt.
If you are thinking about buying a segregated fund, be sure to ask your licensed insurance agent about the Fund Facts, a document that highlights key information about the fund. It should be available on the insurance company’s website, or you can request it from the person selling you the fund.
What Risks do They Have?
Segregated funds take some of the risk out of investing because they offer a guaranteed return if you hold the fund until your contract matures (usually between 10 and 20 years). However, if you need to sell before the maturity date, nothing is guaranteed.
A segregated fund’s risk stems from the investments it holds. If the investments do well, then you will get good returns. But if the fund manager makes bad investment decisions or volatile market conditions cause the fund to perform poorly, then you risk losing money on your investment, if you sell before it matures.
Can You Sell Them Easily?
Yes. It’s easy to sell segregated funds back to the fund company, but if you sell, which is called a redemption, before the maturity date, you receive market price for your units, minus any redemption fees you owe. This means you could lose money.
What are the Associated Costs?
Segregated funds usually have higher MER than mutual funds, because of the built-in insurance benefit. There are also sales fees associated with the purchase of any investment fund. See our Fees & Charges page for more information.
What are the Expected Types of Returns?
Segregated funds earn interest, dividends, and capital gains like mutual funds. The fund grows by retaining and reinvesting the earnings.
A feature unique to many segregated funds is the reset option. This means that if the value of the fund has gone up, you may be able to lock in that increased value and receive at least the guaranteed percentage of that increased value provided you hold the fund to the maturity date. If you choose this option, the fund company will extend the maturity date as well. Certain funds have a Guaranteed Minimum Withdrawal Benefit (GMWB), which guarantees you retirement income. There may be additional fees or insurance cost for the reset or GMWB options.
If you redeem your units back to the insurance company, you will receive market value for your investment, minus any fees you owe. You will earn capital gains if the fund has made money, or capital losses if the fund has lost money.
Segregated funds have a maturity and death guarantee. This means that if you hold the fund until it matures, the fund company will pay you 75% to 100% of your principal investment. If the fund holder of the fund passes away, the named beneficiary gets a guaranteed minimum amount based on the life insurance associated with the fund. The beneficiary gets the money directly and avoids probate fees and executor fees.