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Segregated fund

Definition

A segregated fund* is an investment that’s similar to a mutual fund, but usually offers guaranteed reimbursements upon death or at fund maturity.

Death guarantee

If you die before the maturity date and the value of your fund is less than the capital initially invested, this guarantee will reimburse the difference. The guarantee may be lower if you make deposits after a certain age, for example, age 80.

Maturity guarantee

This guarantee ensures that at the maturity date you will receive at least 75% of the capital you invested. Usually you must hold a segregated fund* investment for many years, for example 10, 15 or 20 years in order to take advantage of this guarantee. Some funds guarantee 100% or more of the capital invested at maturity. In some cases, you must hold the segregated fund* investment for 20 years to take advantage of the maturity guarantee. You may have only a few days at the contract anniversary date to take advantage of the guarantee, and usually you must give your insurer notice in writing. 

Capital guarantee applies only at maturity or upon death.

How does a segregated fund work?

You invest in funds that are similar to mutual funds. As a general rule, depending on your degree of risk tolerance and your financial objectives, you can choose from a broad range of funds (balanced funds, Canadian equity funds, etc.). Your investments will fluctuate based on the market value of the securities that make up the funds.

Who can sell segregated funds?

Only life insurance representatives (financial security advisors), are authorized by the AMF to sell segregated fund*.

Investment risk

Despite the guarantees that segregated fund* offer, each type of fund (money market, bond, equity, etc.) carries a risk. For example, if you have a 75% capital guarantee, you can still lose 25% of your capital at maturity. The loss may be more if you need to redeem your contract before its maturity date — if you need cash, for example — because in many cases, the guarantee does not apply. In addition, segregated fund* are subject to annual fees that reduce returns.

Long-term investment

With only a few exceptions, you can redeem your investment at any time, but you will lose the guarantee if you don’t comply with conditions specified in the contract. So before investing you must make sure that you won’t need your funds until the maturity date. A fee is usually charged to close a segregated fund* investment.

Price of protection

Segregated fund guarantees are provided at a cost. Compared with equivalent mutual fund investments, segregated fund* usually have higher fees. This difference is due primarily to the cost of the death and maturity benefits. The following table gives an example, using $5,000 invested for 10 years and 20 years in a segregated fund* offering a 100% capital guarantee at maturity. The annual average return before fees is 7%. The example assumes that segregated fund* fees are 3.4% per year, compared with mutual fund fees of 2.4%. Consequently, the example uses a 3.6% annual return net of fees.

Additional cost for segregated fund* guarantees
(1% per year)

 

Value at maturity for a
$5,000 initial investment1

  10-year maturity 20-year maturity
Value at maturity before deducting fees $9,840 $19,350
Basic fees for funds
(2.4% per year)
 $2,000 $7,050
Value of fund at maturity, after basic fees  $7,840 $12,300
$720 $2,160
Value of segregated fund at maturity, after fees $7,120 $10,140

1 Amounts are approximate and have been rounded.

 

In the example above, annual fees for segregated fund* (3.4%) are nearly half of the return (7%). You should take this into consideration before investing.
On the other hand, if your segregated fund* lose value, the guarantee will apply at the maturity date. Here is an example of a $5,000 investment that has lost 15% of its value over 10 years.

Fund type VALUE AT MATURITY
$5,000 initial investment (after fees)
 Mutual fund  $3,320
 Segregated fund with 100% guarantee  $5,000

Although the fund declined in value, fees of $930 were charged over 10 years for mutual fund investments, and this increased the loss.

Assuris

In the event of an insurer’s financial failure, Assuris protects contract guarantees up to certain amounts and under certain conditions. For more details, go to www.assuris.ca.

Whether you are considering mutual funds or segregated fund*, you should first make sure that the investment you choose meets your financial objectives and risk tolerance. If it doesn’t, perhaps it’s not the fund for you! Speak to your representative.

Never buy a financial product that you are unfamiliar with or do not understand.

Here are some questions to ask your representative before making a purchase:

  • What guarantees does this product offer?
  • What fees will apply?
  • Could these fees rise? If they do, what are my rights? (Don’t forget that you must usually hold the investment at least 10 years to take advantage of certain benefits.)

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* This form will help you understand individual segregated funds. Group segregated funds are also available but have different features.