A Segregated fund, like an investment fund, is made up of a combination of stocks, bonds and other securities. Insurance companies create their own funds and/or incorporate investment funds from Mutual fund companies into their own annuity contracts.
While a Segregated fund functions much like a mutual fund or investment fund, it is actually a annuity contract with mutual fund-like characteristics. It provides for individual investors to purchase an investment fund that benefits from growth in the financial markets and also offers certain guarantees. Segregated funds are often described as “mutual funds with a guarantee.” Segregated funds are offered exclusively by Life insurance companies in Canada and often envied by investors all over the world.
The Protection of a Segregated fund
Segregated fund guarantees differ from company to company, here are some options:
Many Segregated funds offer a guaranteed return on the initial investment of at least 75% if held for at least 10 years or upon the death of the account holder. Some Segregated funds may offer an option for the return of 100% of the original investment after 10 years or upon the death of the account holder.
Several Segregated funds offer a variety of “reset” options. These resets provide for investors to lock in gains from market gains.
Protection From Creditors
From a legal perspective, assets held in Segregated funds are generally protected if the account holder files for bankruptcy, as long as assets weren’t moved into the account strictly for the purpose of creditor evasion. This protects family members such as spouses, children, grandchildren and others should the account holder encounter financial difficulties.
Assets held in Segregated funds are not subject to probate fees. Proceeds go directly to the designated beneficiary upon the death of the account holder. This allows the process to be completed quickly and minimizes the costs associated with wealth transfer.
What many say is the best option… Peace of mind…
Segregated funds are designed to offer individuals who seek to invest in financial markets, a unique opportunity to benefit from the upside potential while protecting one from the possibility of losing money.
There are three ways investors can make a return from a Segregated fund:
- Investors can earn income from dividends on stocks and interest on bonds. A mutual fund company pays out nearly all of the income it receives over the year to fund owners in the form of a distribution.
- Where the fund company sells securities that have increased in price, the fund has a capital gain. Most fund companies also pass on these gains to investors in a distribution.
- If and when fund holdings increase in price but are not sold by the fund manager, the fund’s shares increase in price. Investors can then sell their mutual fund shares for a profit.
Learn how you can hold Segregated funds in your portfolio with the same cost of holding a Mutual fund.