Segregated funds explained

Segregated funds combine the growth potential of investment funds with insurance protection.

Segregated (or seg) funds are an investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition product sold by life insuranceLife Insurance Insurance that pays cash to your family or other beneficiary after your death. This can give them income and help pay your funeral and other final costs.+ read full definition companies. They are individual insurance contracts that investInvest To use money for the purpose of making more money by making an investment. Often involves risk.+ read full definition in one or more underlying assets, such as a mutual fundMutual fund An investment that pools money from many people and invests it in a mix of investments such as stocks and bonds. A professional manager chooses investments that match the fund’s goals for risk and return. You can redeem your fund units at any time.+ read full definition.

Unlike mutual funds, segregated funds provide a guarantee to protect part of the money you invest (75% to 100%). Even if the underlying fund loses money, you are guaranteed to get back some or all of your principalPrincipal The total amount of money that you invest, or the total amount of money you owe on a debt.+ read full definition investment. But you have to hold your investment for a certain length of time (usually 10 years) to benefitBenefit Money, goods, or services that you get from your workplace or from a government program such as the Canada Pension Plan.+ read full definition from the guarantee. And you pay an additional fee for this insurance protection.


If you cash out before the maturity dateMaturity date The date when an investment becomes due. On that date, you get your money back without any penalty. Any interest payments stop.+ 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 your investment is worth as at a certain date. Example: If you had 100 units and the price was $2 on the statement date, their market value would be $200.+ read full definition of your investment, less any fees. This may be more or less than what you originally invested.

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 beneficiary after your death. Example: If you contributed to the Canada Pension Plan, money may go to your estate, spouse or common-law partner and children.+ 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 government programs and other costs.+ 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, you must sign a legal contract that gives them the right to claim your car, home or other assets if you don’t pay back the loan.+ read full definition protection – This is a key feature for business owners in particular.

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 for life. Others save up money for you while you are working. You use that money to create income after you retire.+ 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 property insurance. Others sell all types of insurance.+ read full definition, the fund optionsOptions An investment that gives you the right to buy or sell it at a set price by a set date. The buy right is termed a “call” option, and the sell right is termed a “put” option. You buy options on a stock exchange.+ 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 to ensure it’s valid. Also includes paying any debts and giving your money and property to the beneficiaries you have named in 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 when you die. You may name beneficiaries in your will, insurance policy, retirement plan, annuity, trust or other contracts.+ read full definition is named.


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 in one or more underlying assets, such as a mutual fund.+ 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
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