Segregated Funds
Protect your Money, Protect your Future
Protect your Money, Protect your Future
Segregated Funds are industry’s best tool to Invest your money in any form of account, RRSP, RRIF, RESP, TFSA, NON-REGISTERED Etc. with ample safety and return.
The legal term for a segregated fund is Individual Variable Insurance Contract or IVIC. This term is rarely used and segregated funds are most often simply called “segregated” or “seg” funds.
Segregated funds are a life insurance company product. However, not all life insurers offer segregated funds. Those that do, go through a process to develop a fund and get the necessary approvals from regulators for the fund. Once all approvals are in place, the fund is open for investment. The date when the fund begins operations is its “inception” date. Insurers keep their segregated funds separate from other company assets, which is why the funds are called “segregated.”
Insurers manage their segregated funds on an ongoing basis and provide relevant information to potential and existing investors. They are required, by law, to set aside financial reserves so they can meet their contractual obligations for maturity and death benefit guarantees.
All investor money is pooled in the fund. This includes deposits made by individuals and groups. Those deposits form a large pool of money that the segregated fund manager invests according to the type of fund that has been created. For instance, the money invested in a bond fund is used by its manager to invest primarily in bonds.
Insurers offer many types of segregated funds to match up with the investment objectives of individual investors. Segregated funds are available as investment options for non-registered accounts and registered accounts, such as an RRSP.
Segregated funds offer some unique advantages compared to other forms of investment. They also have many features in common with other fund-type investments. This overview is an introduction to the reasons people buy segregated funds. It also introduces some of the disadvantages to be taken into consideration regarding segregated funds. Details on these advantages, and disadvantages, appear in the following chapters of this manual.
Unique advantages of segregated funds:
Some Advantages segregated funds share with other fund investments:
Some unique Disadvantages of segregated funds that are not shared by other fund investments:
Some disadvantages segregated funds share with other fund investments:
A minimum is specified for each fund for both lump sum deposits, which include transfers, and periodic deposits.
The premium is allocated to fund units at their net asset value (NAV) on the valuation day that applies to the lump sum or periodic deposit. The number of units received may not be the same across all recommendations since the number depends on the NAV per unit of each fund. Receiving more or less units of one fund over another is not an indicator of fund quality or performance. The NAV per unit of a fund forms a benchmark against which future performance is monitored. It is essential that products with similar characteristics be compared in the recommendation. When different elements enter into the comparison, they must be stressed as a differentiator.
SEG-FUNDS- BENEFITS AND CHARECTORISTICS
1) Professional management
Segregated funds employ professional investment managers to provide investment management and advice. These managers are compensated by fees which are part of the management expense ratio (MER) charged against fund assets to investors. The fund manager is a highly educated and well-trained investment professional. The average investor has neither the time nor the expertise to compete with the typical fund manager. By leaving investment decisions in the hands of the fund manager, the average investor can achieve his investment objectives without having to be actively involved in the day-to-day management of his investments, thereby eliminating the obligation to make ongoing decisions.
2) Guarantees
Guarantees apply at the rate offered by the recommended fund, either 75% or 100%. If a switch is made from one fund to another during the contract, the guarantee may change if the new fund has a different rate for its guarantees
The maturity guarantee is automatically provided in all segregated fund contracts as 75% or 100% of deposits at maturity. The deposits are guaranteed to the percentage selected for MATURITY. If the market value of the account is greater than the guarantee due to fund performance, the investor receives the market value. The investor LOSES the benefit of the maturity guarantee if he surrenders the contract before its maturity date. He also will find that the guarantee is adjusted if a withdrawal is made. The 100% guarantee generates a higher fee for the management expense ratio (MER). While the maturity guarantee protects the investor against poor performance, the upside is unlimited. Some funds have higher potential for growth than others. This is related to their risk and an assessment of risk is detailed in the information folder and Fund Facts for each fund.
Just like the maturity guarantee, the death benefit guarantee is an automatic part of the contract. However, the investor can decide which guarantee (75% or 100%) he should choose as part of the investment. The beneficiaries will receive, the opted guaranteed percentage of the amount invested if the investor dies while the market value is less than the guaranteed amount. This guarantee can have great value in the peace of mind it brings to those whose health is impaired at the time the contract is taken out, or to those who are older.
3) Contract Maturity Date
The minimum maturity date is 10 or 15 years, depends on the funds, from the deposit date, and this date will be the actual time, i.e., the month, day and year for maturity based on an initial deposit. The Investor should know the relationship between a higher guarantee or guarantees and an extended maturity date – some segregated funds that offer 100% guarantees require a 15-year period to maturity.
4) Reset Principle
The reset feature allows the investor in a segregated fund to lock in, at specified intervals (e.g. once a year), increases in the market value of the investment. If market value has declined at a reset date, then the reset feature is not utilized. Not all segregated funds offer reset. There may be other aspects of reset that need to be compared between recommendations, such as number of resets permitted in a year or whether reset is automatic or on client instruction. Also the reset affects the maturity date, maturity guarantee and death benefit guarantee of the contract.
5) Taxation on Seg Funds
Taxation of the fund will depend on whether the contract is set up as a registered or non-registered account. Taxation rules are pre-determined by income tax legislation so no point of recommendation can usually be made on this basis.
As a reminder:
6) Sales Charge
The sales charge or load is specified by the fund as Front-end load, a Deferred Sale Charge (DSC) or NO LOAD. It is paid by the investor.
The cost of a front-end load can be calculated by the agent for the investor. It is charged once and reduces the sum being invested.
A DSC is charged to every withdrawal according to the DSC schedule for the fund. The DSC applies over a set period of time to a full or partial withdrawal from a segregated fund. The charge is a percentage applied against the amount withdrawn. It declines over a number of years until it is eliminated.
Segregated funds that do not have a sales charge are called “no-load funds.” They may compensate for the absence of a sales charge by charging a higher management expense fee.
7) Fund Management Expense Ratio (MER)
The management expense is the combination of management fee for a fund, its operating expenses (administration, legal fees, marketing and other similar costs) and the cost of paying for maturity and death benefit guarantees. When these expenses are added together and expressed as an annual percentage of the total value of the fund, it becomes the management expense ratio (MER).
MER is not based on performance and it is charged regardless of performance. MERs vary between funds and have a financial impact because they reduce the return on investment. The higher the MER, the greater the reduction in return to the investor.
Fund performance is reported net of MER and returns received net of MER; in other words, if a fund has a reported return of 8% and an MER of 2.%, the real return on the fund is 10% (8% + 2%). However, the investor earns 8%.
However, if a fund with a higher MER performs much better than a fund with a lower MER, the investor may quite happily pay the higher MER since his investment is growing at a better rate.
8) Ability to Withdraw (Redemption)
The investor enters into the segregated fund contract with the intention of seeing the contract mature in, at least, ten years. However, his financial circumstances can change during the ten-year period and he may find he needs to make a withdrawal from the contract to receive cash in hand. A withdrawal is also known as redemption.
The investor may make a withdrawal at any time. This provides him with investment flexibility.
The maturity guarantee and death benefit guarantee of the contract are reduced as a result of the withdrawal because the investor has fewer fund units. The insurer calculates the new guarantees according to the terms of the contract. The opted type of Sales charge may also be applied against the amount withdrawn.
A withdrawal may trigger a capital gain or loss. The contract owner receives a tax reporting slip from the insurer so that the potential gain may be included as income in the year it has been received.
9) Exemption from Probate Fees
Probate is the process in which the will of a deceased is proven to be valid and the person appointed as executor of the will is accepted. It occurs in the provincial “home” court of the deceased and is finalized when “Letters Probate” or an equivalent document is issued. It can take time – months, or even years – and in many cases, there are fees.
Probate fees are a charge by the province against the value of a deceased’s estate. Only Québec does not charge probate fees.
Probate fees must be paid by the estate of the deceased before any property can be inherited as specified in the will. They can significantly reduce estate value in a province, such as Ontario, that does not put an upper-end cap on probate fees.
Probate fees do not apply when the beneficiary of a segregated fund contract is not the estate. A named beneficiary receives the proceeds from the contract probate-free. This includes the spouse, parents, children and grandchildren of the contract owner or annuitant. The ability to put the proceeds into the hands of the beneficiary without going to probate is one of the single most important benefits of segregated fund ownership. Potentially thousands of dollars in probate fees can be saved.
However, there will be no saving if the estate is named as beneficiary. If the estate receives the proceeds, it becomes part of the total estate value and subject to probate fees.
10) Estate planning benefits
Because segregated funds are theoretically insurance contracts, the investors can name a beneficiary to allow the investment to bypass probate process and the estate at death. With segregated fund contracts, the money goes directly and quickly to the person who inherits the money (the beneficiary of the contract).
While poor estate planning can corrode your wealth for the next generation and cause distressing, potentially expensive delays, segregated fund contracts can help make sure your beneficiaries will receive their inheritance immediately and cost-effectively.
It will also help to preserve confidentiality: wills can become public documents, and the information in them can be easily accessed. Segregated fund contracts are private.
11) Investor Protection
Consumers are protected against insolvency, or bankruptcy, of the insurer that holds their segregated fund contracts through Assuris – a non-profit organization that protects policyholders if their life insurance company fails. (www.assuris.ca) This means if the insurer itself goes bankrupt, the invested money is protected, up to certain limits, by Assuris. The investor is protected against total loss of his principal.
If an insurer that provides segregated funds becomes insolvent, that is unable to meet the claims of its contract owners, Assuris will step in to provide investor protection. Assuris facilitates a quick transfer of policies from the insolvent insurer to another insurer that has the financial capacity to honour guarantees and benefits.
Guaranteed investments plus segregated funds and annuities provide protection against market losses. Non-guaranteed investments can fall to zero value in the market and there is no recourse or protection available.
12) Creditor protection
When a person or entity, such as a business, is owed money by another, that person or entity is a creditor. A creditor may make a court claim for money owed if the borrower fails to make good on payment. Segregated funds provide the potential for protecting contract owners from the claims of creditors.
They do so because they are insurance contracts and claims are not successful if the spouse, parent, children or grandchildren are named as beneficiary in the contract, if the beneficiary is irrevocable, or if the account is a registered account.
A person must not, however, try to avoid creditor claims by investing in a segregated fund. For this reason, it is necessary for the segregated fund contract to be acquired for the purpose of investment, not for the purpose of avoiding creditors.
Please contact us for more details and assistance to get your money invested and secure your financial future. We are more than happy to serve you.