CHAPTER 1
Segregated Funds
How segregated funds work as insurance contracts, their guarantees, and how they compare to mutual funds.
What are Segregated Funds?
Segregated funds are individual variable insurance contracts (IVICs) — they are insurance products, not securities. They combine market-linked investment growth with insurance guarantees.
Key differences from mutual funds:
| Feature | Segregated Fund | Mutual Fund |
| Death benefit guarantee | ✓ Yes (75–100%) | ✗ No |
| Maturity guarantee | ✓ Yes (75–100%) | ✗ No |
| Creditor protection | ✓ Possible | ✗ No |
| Bypasses probate | ✓ With named beneficiary | ✗ No |
| Regulated by | Insurance regulator | Securities regulator |
| MER | Higher | Lower |
- Parties to a seg fund contract:
- Contract owner — pays premiums, controls the contract
- Annuitant — the person whose life triggers the death benefit and maturity guarantee
- Beneficiary — receives the death benefit on annuitant's death
KEY POINTS
- ✓Segregated funds are insurance contracts — not securities
- ✓Offer maturity and death benefit guarantees (75% or 100%)
- ✓Potential creditor protection with preferred beneficiary
- ✓Named beneficiary bypasses probate — paid directly
- ✓Higher MER than mutual funds due to insurance cost
Guarantees & Resets
Maturity guarantee — at the contract's maturity date (minimum 10 years), the contract owner receives at least the guaranteed minimum (75% or 100% of deposits), regardless of market performance. If the fund value is higher, they receive the higher amount.
Death benefit guarantee — if the annuitant dies, the beneficiary receives at least the guaranteed minimum (75% or 100% of deposits), regardless of the fund's market value at that time.
Resets — allow the contract owner to lock in a higher fund value as the new guaranteed base when markets have risen. The maturity period restarts from the reset date (back to 10 years). Resets are typically limited to a certain number per year or per contract.
75% vs 100% guarantee: A 100% maturity guarantee means you are guaranteed to get back at least everything you put in after 10 years. A 75% guarantee means you could lose up to 25%.
KEY POINTS
- ✓Maturity guarantee: minimum 10-year holding period required
- ✓Death benefit guarantee applies at any time — not just at maturity
- ✓Resets lock in gains but restart the 10-year maturity clock
- ✓100% guarantee: all deposits guaranteed at maturity
- ✓75% guarantee: up to 25% of deposits could be lost
Creditor Protection & Probate Bypass
Creditor protection — because the assets legally belong to the insurance company (not the investor), and the death benefit flows to a named beneficiary, segregated funds may be protected from the contract owner's creditors in bankruptcy.
- Preferred beneficiaries that may trigger creditor protection:
- Spouse or common-law partner
- Child or grandchild
- Parent
Or an irrevocable beneficiary designation.
Important caveat: Creditor protection is not absolute. Transfers made to defeat creditors (fraudulent conveyance) will not be protected. The protection is strongest when established well before financial difficulties arise.
- Probate bypass — with a named beneficiary, the death benefit is paid directly to that person, bypassing the estate entirely. This:
- Avoids probate fees (which can be significant in some provinces)
- Keeps the benefit private
- Speeds up payment to the beneficiary
KEY POINTS
- ✓Preferred beneficiary designation may protect from creditors
- ✓Protection is not absolute — fraudulent transfers are not protected
- ✓Establish protection early — before financial difficulties
- ✓Named beneficiary bypasses estate, avoids probate fees
- ✓Irrevocable beneficiary provides the strongest protection