3 advantages of segregated funds

1. Principal guaranteed – Depending on the contractContract A binding written or verbal agreement that can be enforced by law.+ read full definition, 75% to 100% of your principal investment is guaranteed if you hold your fund for a certain length of time (usually 10 years). If the fund value rises, some segregated funds also let you “reset” the guaranteed amount to this higher value – but this will also reset the length of time that you must hold the fund (usually 10 years from date of reset).
2. Guaranteed death benefitDeath benefit Money that your life insurance or savings and pension plan(s) pays to your estate or…+ read full definition – Depending on the contract, your beneficiaries will receive 75% to 100% of your contributions taxTax A fee the government charges on income, property, and sales. The money goes to finance…+ read full definition free when you die. This amount is not subject to probate fees if your beneficiaries are named in the contract.
3. Potential creditorCreditor A person or institution that lends money. To borrow from a bank or finance company,…+ read full definition protection – This is a key feature for business owners in particular.

Warning

If you cash out before the maturity dateMaturity date The date when an investment becomes due. On that date, you get your money back…+ read full definition, the guarantee won’t apply. You’ll get the current market valueMarket value The value of an investment on the statement date. The market value tells you what…+ read full definition of your investment, less any fees. This may be more or less than what you originally invested.

3 disadvantages of segregated funds

1. Your money is locked in – You have to keep your money in the fund until the maturity date (usually 10 years) to get the guarantee. If you cash out before that, you’ll get the current market value of your investment, which may be more or less than what you originally invested. You may also be charged a penalty.
2. Higher fees – Segregated funds usually have higher management expense ratios (MERs) than mutual funds. This is to cover the cost of the insurance features.
3. Penalties for early withdrawals – You may have to pay a penalty if you cash out your investment before the maturity date.

Retail versus group retirement plan segregated funds

If you have a workplace pensionPension A steady income you get after you retire. Some pensions pay you a fixed amount…+ read full definition or savings plan that is administered by an insurance companyInsurance company A company that sells insurance products. Some companies sell only life insurance. Some sell only…+ read full definition, the fund optionsOptions An investment that gives you the right to buy or sell it at a set…+ read full definition available to you will typically be segregated funds. However, these segregated funds do not carry an insurance guarantee and do not have the higher fees associated with retail segregated funds that you buy as an individual. However, because they are insurance contracts, they do carry the potential for creditor protection and the avoidance of probateProbate Fees to settle your estate after your death. The probate process includes reviewing your will…+ read full definition fees if a beneficiaryBeneficiary The person(s), institution, trustee or estate you choose to give money, property or other benefits…+ read full definition is named.

Warning

You will pay higher fees for a retail segregated fundSegregated fund An investment product sold by life insurance companies. They are individual insurance contracts that invest…+ read full definition because of the insurance protection it provides. Carefully consider your need for these features before you buy.

3 key points

1. 75% to 100% of principal is guaranteed upon death or maturity
2. Investment must be held until the maturity date (or until death if earlier) to get the guarantee
3. Higher fees to cover the cost of the insurance protection