Segregated funds are a type of investment commonly offered through insurance companies, combining the growth potential of mutual funds with the security of insurance benefits. These funds are particularly popular in Canada and other jurisdictions where investors seek both market exposure and guarantees for their capital. Unlike traditional mutual funds, segregated funds come with features like maturity guarantees and death benefits, making them appealing to individuals with lower risk tolerance or those planning for retirement. To understand how they work, it’s helpful to look at real-world examples and explore the structure, purpose, and benefits of these unique financial products.
Understanding Segregated Funds
What Are Segregated Funds?
Segregated funds are investment products offered by life insurance companies. They are similar to mutual funds in terms of asset allocation and investment objectives but are wrapped inside an insurance contract. This structure offers additional protections such as:
- A guaranteed percentage of the original investment at maturity or upon death
- Creditor protection in certain cases
- Bypassing probate through a named beneficiary
The name ‘segregated’ refers to the fact that the invested assets are kept separate from the general assets of the insurance company, providing extra protection for policyholders.
How Segregated Funds Work
When an individual invests in a segregated fund, they are actually purchasing a life insurance contract. These contracts typically offer 75% to 100% guarantees on the invested amount, depending on the length of the investment period and the insurance provider’s terms. If the market value drops, the guarantee protects a portion of the capital either after a maturity period (usually 10 years) or upon the investor’s death.
Examples of Segregated Funds
1. Sun Life Granite Managed Portfolios
Sun Life offers a range of segregated funds under its Granite series. These are diversified portfolios that invest in multiple asset classes such as equities, fixed income, and alternative investments. Each fund in this series is designed to match a specific risk profile for example, conservative, balanced, or growth.
- Sun Life Granite Conservative Segregated Fund: Focuses on capital preservation and income generation, with high allocation to bonds and stable equities.
- Sun Life Granite Growth Segregated Fund: More aggressive, offering higher equity exposure for long-term capital appreciation.
Each of these funds includes a maturity and death benefit guarantee, which typically ranges from 75% to 100% of the invested capital.
2. Manulife Investment Plus Segregated Funds
Manulife’s Investment Plus product line includes a broad selection of segregated funds across different asset categories. These funds are available with multiple guarantee levels and reset features to lock in market gains.
- Manulife Canadian Balanced Fund: A mix of Canadian equities and fixed income, ideal for moderate-risk investors seeking growth and stability.
- Manulife U.S. Equity Fund: Focuses on large-cap U.S. stocks, suitable for growth-oriented investors with a long-term outlook.
Investors can also select optional riders, such as guaranteed minimum withdrawal benefits, which add further layers of income security in retirement.
3. Canada Life Segregated Fund Series
Canada Life offers segregated funds under several series, including the Wealth Achiever and MarketPlus options. These cater to various investor needs, from conservative savers to those seeking aggressive market growth.
- Canada Life Wealth Achiever Conservative Fund: Built for individuals who prioritize capital protection and steady income.
- Canada Life MarketPlus Growth Fund: Targets long-term appreciation with a portfolio heavily weighted in equities.
All Canada Life segregated funds include death and maturity guarantees, as well as potential for creditor protection especially beneficial for self-employed individuals.
4. Industrial Alliance (iA) Evolution Segregated Funds
Industrial Alliance’s Evolution series provides a flexible selection of funds, allowing investors to build portfolios tailored to their goals and risk preferences.
- iA Evolution Moderate Portfolio: Balanced allocation of stocks and bonds, ideal for medium-term growth and security.
- iA Evolution Equity Growth Portfolio: Geared toward capital growth with high equity exposure and more market volatility.
iA also offers reset features that allow investors to update their guaranteed capital amount to reflect market gains during the life of the contract.
Key Features of Segregated Funds
Capital Guarantees
Most segregated funds offer a guarantee of 75% to 100% of the initial investment, provided the investment is held for the full maturity period (typically 10 years). Upon death, beneficiaries receive at least the guaranteed amount, regardless of market conditions.
Creditor Protection
If the investor names a family member or dependent as a beneficiary, the segregated fund may be shielded from creditors. This is a unique advantage, especially for business owners or professionals exposed to legal or financial risks.
Bypassing Probate
Because segregated funds are part of an insurance contract, they are not considered part of the investor’s estate upon death. This allows the funds to pass directly to beneficiaries without going through the often lengthy and expensive probate process.
Reset Options
Some segregated fund products allow periodic ‘resets’ of the guaranteed amount, locking in investment gains. This ensures that the guarantee increases if the market performs well, further securing the investor’s capital.
Considerations When Investing
Higher Fees
Because of the added insurance features and guarantees, segregated funds typically have higher management expense ratios (MERs) than mutual funds. Investors should weigh the cost against the potential benefits, especially if they are unlikely to need the insurance components.
Suitability
Segregated funds are most suitable for:
- Conservative investors concerned about market volatility
- Retirees who need capital protection and steady income
- Business owners seeking creditor protection
- Estate planners looking to simplify the transfer of assets
Lock-in Periods
To benefit from maturity guarantees, segregated funds usually require the investment to be held for a minimum term (often 10 years). Withdrawing early may reduce or eliminate the guaranteed protection.
Segregated funds offer a unique blend of investment growth and insurance protection, making them attractive for investors who prioritize security along with returns. The examples provided such as those from Sun Life, Manulife, Canada Life, and Industrial Alliance highlight the flexibility and customization available in today’s segregated fund market. While higher fees and lock-in periods are important to consider, the benefits of capital guarantees, creditor protection, and probate avoidance can be compelling reasons to include segregated funds in a diversified investment portfolio. Whether for retirement planning or estate preservation, segregated funds present a solid option for cautious yet growth-minded investors.