Segregated fund, or Seg fund

Segregated Fund or Seg Fund is a type of investment fund administered by Canadian insurance companies in the form of individual, variable life insurance contracts offering certain guarantees to the policyholder such as reimbursement of capital upon death.[1][2] As required by law, these funds are fully segregated from the company's general investment funds, hence the eponym. A segregated fund is synonymous with the U.S. insurance industry "separate account" and related insurance and annuity products. A segregated fund is an investment fund that combines the growth potential of a mutual fund with the security of a life insurance policy. Segregated funds are often referred to as "mutual funds with an insurance policy wrapper".

Like mutual funds, segregated funds consist of a pool of investments in securities such as bonds, debentures, and stocks. The value of the segregated fund fluctuates according to the market value of the underlying securities.

Segregated funds do not issue units or shares; therefore, a segregated fund investor is not referred to as a unitholder. Instead, the investor is the holder of a segregated fund contract. Contracts can be registered (held inside an RRSP or TFSA) or non-registered (not held inside an RRSP or TFSA). Registered investments qualify for annual tax-sheltered RRSP or TFSA contributions. Non-registered investments are subject to tax payments on the capital gains each year and capital losses can also be claimed

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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.

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