Skip to Main Content

What are segregated funds?

Segregated funds are an investment product purchased through a life insurance company. They’re insurance products with investment characteristics.

These funds are kept separate from other assets of the company meaning that only investors have access to their value.

These types of investment are individual insurance contracts that usually invest in one or more assets, such as stocks. Unlike stocks and mutual funds, these funds have a guarantee that you will have some or all of the money you invested returned to you.

If a person purchases a segregated fund they purchase a contract called an Individual Variable Insurance Contract. It gives the consumer rights and benefits and also outlines what the maturity term is of the investment and what the obligations of the client are. It’s often advisable to consult with an accountant or lawyer when looking through such a contract.

How do segregated funds work?

The purchaser of the fund pays premiums to an insurance policy and assigns it to the segregated fund investment. The investment manager then invests the funds in stocks, bonds, mutual funds or other assets.

What are advantages to buying segregated funds?

There are certainly a number of advantages to investing in a segregated fund which includes:

  • Your money back is guaranteed: As per your contract you should be entitled to 75 per cent to 100 per cent of your principal investment back, if you have invested for a particular period of time
    • If the fund value increases, you may be eligible for a “reset” of the guaranteed amount to the higher value, however that is only if your segregated fund allows for it and it’s likely the funds will have to be held for a longer time as well;
  • Guaranteed death benefit: your beneficiaries should receive 75 per cent to 100 per cent of the investment tax free after you die. However, that is depending on the type of contract you made for the segregated fund;
  • Potential protection from creditors.

What are disadvantages to buying segregated funds?

As with every investment there are both advantages and disadvantages. The disadvantages of segregated funds are:

  • If you withdraw money early you are subject to penalties;
  • The money is locked in: Segregated funds have a maturity date and you have to keep the money in the fund until the maturity date. Maturity dates vary but are often set at 10 years. If you decide to withdraw the money early you’ll get the current market value of the investment minus any penalties you may be charged;
  • Higher fees for managing the investment: Segregated funds have higher management expense ratios than other types of investments. Management expense ratio’s include things such as: sales charges, account fees, fund expenses and transaction fees.

If you are deciding on an investment option and you are considering segregated funds you should consult with an investment broker, an accountant, a lawyer and/or a financial advisor.

Read more:

Key Facts About Segregated Funds Contracts

Segregated funds explained