Seeking shelter in stormy seas

Segregated fund contracts are designed to help offer a safe harbour for Canadians worried about volatile markets.

As Canadians grapple with understanding and adapting to the impact of COVID-19, many people are apprehensive about investing. And who can blame them? The economy has taken an unprecedented blow. Understandably, so has investor confidence. Everyone is still trying to understand the implications, which may not be clear for some time. Market volatility, together with economic uncertainty, is the new normal – at least for now.

But even in a tough investment environment, diversification, with at least some exposure to stock markets, may be one way to stay ahead of inflation. This is precisely why today’s turbulent conditions are leading some investors to take a second look at segregated fund solutions.

What is a segregated fund contract?

A segregated fund contract combines the growth potential offered by a broad range of investment funds with the unique estate planning and wealth protection features of an insurance contract. Segregated fund contracts can help minimize exposure to risk through various guarantees, such as income, death and maturity guarantees, potential creditor protection features, and estate planning benefits – all from a single product or insurance contract.

Segregated fund products demystified

An important thing to know about segregated fund contracts is that they’re actually insurance products. Only insurance companies can offer them, and only licensed insurance representatives can sell them.

Segregated fund contracts also vary widely. They offer different guarantees, features and fees. Your advisor can explain the differences and recommend various options available to you.

Who might choose a segregated fund contract?

Segregated fund solutions typically appeal to conservative investors, especially during turbulent markets. For investors who want to protect wealth for their loved ones, ensure it gets transferred as seamlessly as possible, or who don’t want to lose sleep over the market roller-coaster ride, segregated fund contracts can provide some peace of mind. They may also appeal to business owners or professionals for whom potential creditor protection is top of mind.

Protecting wealth for loved ones

Because segregated funds are technically insurance contracts, they let investors name a beneficiary so that the investment can bypass probate and the estate at death. Probate is a legal process that certifies a will and transfers assets to heirs. It can take time – months, or even years – and in many cases, there are fees[1]. With segregated fund contacts, the money goes directly, and quickly, to the person inheriting the money (the beneficiary of the contract).

While poor estate planning can erode your wealth for the next generation and cause distressing, potentially expensive delays, segregated fund products can help make sure your beneficiaries will inherit wealth quickly and cost-effectively. They may also preserve confidentiality: wills can become public documents, and the information in them can easily get out. Segregated fund contracts are private.[2]

The value of a guarantee

For some risk-averse investors, a segregated fund contract’s most appealing attributes are its guarantees. After all, life doesn’t come with too many guarantees.

With a segregated fund contract, you’re sure to receive at least 75 per cent of your deposits (or 100 per cent, depending on the contract), less any withdrawals, when the contract matures. This is known as a maturity guarantee, and it applies at the maturity date (which occurs after a minimum number of years has elapsed or at a contract set date, for example, age 100 of the annuitant), even if markets decline during the period. And if markets rise, you have the opportunity to grow your savings. So, you get the opportunity to protect your capital, while also enjoying growth potential.

Death benefit guarantee

Segregated fund contracts also include a death benefit guarantee. The guarantee can be up to 100 per cent, depending on the type of contract selected and the age of the annuitant when the product is purchased. Your named beneficiary gets the death benefit in the event of death. Your beneficiary can be anyone – a family member, a friend or a charity.

The costs

Keep in mind that the guarantees are a type of insurance, which you’re paying for. Segregated fund costs include management fees, insurance fees, operating costs and applicable sales tax. A contract might also include a charge for early withdrawal. Ask for all the fees and costs to be clearly itemized, so you can make an informed decision.

Decisions, decisions…

That’s a lot to mull over. Segregated fund contracts could be just the answer for investors looking to help minimize risk, and given the ups and downs of today’s markets, they deserve a close look. The best advice? Discuss with your advisor whether segregated fund contracts are right for you. 

Did you know that the time to settle an estate can range from six to 12 months in most cases? It can take years. With segregated fund contracts, the money is usually paid within two weeks.


[1] In Quebec, the probate process and the probate fees (which are minimal) only apply to non-notarial wills.

[2] In Saskatchewan jointly held property and insurance policies with a named beneficiary are included on the application for probate but do not flow through the estate and are not subject to probate fees.