What is a Segregated Fund?
A segregated fund is an investment fund that combines the growth potential of a traditional mutual fund with the security and financial protection of a life insurance policy. Sold by life insurance companies, segregated funds are individual insurance contracts that contain a diversified variety of asset mixes.
How Segregated Funds Work
When you invest in a segregated fund your money is pooled with the money of other people who have also invested in the same segregated fund. The fund is managed by a professional fund manager who strategically buys and sells a variety of investments such as stocks, bonds and mutual funds.
Like a mutual fund, a segregated fund has potential to grow when the market goes up. The advantage of a segregated fund is when the market goes down, a portion of the money you invested—75 to 100 percent—is protected if you hold the fund for a certain length of time as defined by your contract (typically a 10-year maturity date).
For example, even if the underlying fund you’ve invested in loses money, you’re guaranteed to recoup back some or all your initial principal investment. However, if you cash out the segregated fund before the maturity date, you lose the guarantee.
With traditional mutual funds, you not only risk loss of capital gains on your investment but potentially your principal. Some segregated funds also allow you to lock in principal protection when the market value has increased. If you do this, the length of time you must hold the fund is reset.
Benefits of Segregated Funds
Segregated funds offer unique features that mutual funds do not. Approximately 75 to 100 percent of your investment is guaranteed when your contract matures or upon death. Under certain conditions, if your designated beneficiary is a family member (spouse, parent, child, or grandchild), they will directly receive 75 to 100 percent of your contribution tax-free. This contribution, which is similar to a death benefit, is not subject to probate fees if your beneficiary is named in your contract. Segregated funds also offer the potential for protection against creditors in the event of bankruptcy or lawsuit—a feature that is particularly advantageous for business owners.
Segregated funds are a solution if you’re…
- Not eligible for life insurance but are looking for secure, long-term guaranteed investment growth potential to save for a rainy day or retirement.
- Nearing retirement and want a safe, guaranteed investment option to grow a cash reserve within 10 or more years.
- An individual with a low risk tolerance to traditional investments such as mutual funds and don’t want to lose money due to market volatility.
- Wanting a guaranteed investment that provides potential protection from creditors, especially if you are a business owner.
- Wanting a guaranteed investment that can bypass probate and associated fees.