Segregated Funds - The Basics

Updated:
June 30, 2021

Segregated funds are often described as mutual funds with a guarantee. Although they function like mutual funds, they are actually annuity contracts with mutual fund-like characteristics. Similar to mutual funds, segregated funds have a market-based investment component. With segregated funds, a large pool of money belonging to many people is invested in stocks, bonds or other securities—all with the goal of increasing the value of the entire pool. An investor can choose to invest in a segregated fund based on its investment objective and product terms.

However, because life insurance companies issue segregated funds, there is a guarantee attached to the fund that protects the investor's principal from sudden market declines. In this way, you can think of segregated funds as a mutual fund with a safety net.

For investors, segregated fund contracts provide a number of unique benefits:

Guaranteed principal

Segregated funds can guarantee 75 to 100 per cent of your principal investment so long as you hold your fund for a set period of time (typically 10 years).

Guaranteed death benefit

Depending on the contract, segregated funds allow beneficiaries to receive 75 to 100 per cent of contributions should the owner die before the contract matures.

Creditor protection

In many cases, money invested in segregated fund contracts can be protected from creditor seizures. This provides added protection for beneficiaries in the event that the account holder encounters financial difficulties or bankruptcy.

Other Segregated Fund Considerations to Keep in Mind

  • Segregated funds vary based on their investment objective and product terms.
  • Due to their guarantee, segregated fund fees tend to be higher than mutual funds.
  • In order to take full advantage of the guarantee, investors must keep their money in the fund until the maturity date. Cashing out means investors will only receive the market value of the investment minus any withdrawal fees.

Be Prepared

Segregated funds are a popular investment option, but can be complex and difficult to understand. Contact us today to learn more about segregated funds and other investment strategies.

FAQs

What is financial advising?

Financial advising involves providing guidance and advice to individuals, families, or businesses to help them make informed decisions about their financial matters. This can include various aspects such as investment planning, retirement planning, tax planning, estate planning, and more. Financial advisors analyze their clients' financial situations, goals, and risk tolerance to create customized strategies that align with their objectives.

Why is financial planning important?

Financial planning is crucial for several reasons:

Goal Achievement: It helps individuals set and achieve financial goals, whether they are short-term, such as buying a home, or long-term, like funding a comfortable retirement.

Risk Management: Financial planning addresses risks by considering insurance, emergency funds, and other protective measures.

Budgeting and Saving: It promotes responsible money management through budgeting and saving, fostering financial stability.

Wealth Building: Effective financial planning can lead to wealth accumulation and the creation of a secure financial future.

Can financial advisors help with debt?

Yes, financial advisors can help with debt management. They can assess your overall financial situation, create a budget, and develop strategies to pay down debt efficiently. They may also negotiate with creditors on your behalf, provide debt consolidation recommendations, and offer guidance on prioritizing and managing debt repayment.

What exactly does a financial advisor do?

The specific responsibilities of a financial advisor can vary, but generally, they:

  1. Conduct a thorough analysis of a client's financial situation, including income, expenses, assets, and liabilities.
  2. Develop personalized financial plans based on the client's goals, risk tolerance, and time horizon.
  3. Provide investment advice and portfolio management services.
  4. Offer guidance on retirement planning, estate planning, tax planning, and insurance.
  5. Monitor and adjust financial plans as needed based on changes in the client's life or market conditions.
  6. Educate clients on financial matters and empower them to make informed decisions.
What is the average fee for a financial advisor?

The fees charged by financial advisors can vary widely based on factors such as the advisor's experience, the services provided, and the region.

Common fee structures include:

Hourly Fees: Advisors charge an hourly rate for their services.
Flat or Fixed Fees: A set fee is charged for specific services or a comprehensive financial plan.
Asset-based Fees: Fees are a percentage of the assets under management (AUM).
Commission-based Fees: Advisors earn commissions on financial products they sell.
Combination of Fees: Advisors may use a combination of the above fee structures.
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It's important to discuss and clarify fee arrangements with a potential financial advisor before engaging in their services.