Segregated fund
Encyclopedia
A Segregated 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. As required by law, these funds are fully segregated from the company's general investment funds, hence the eponym
. A Seg Fund is synonymous with the U.S. insurance industry "separate account
" and related insurance and annuity products.
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
, debenture
s, and stock
s. 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 non-registered (not held inside an
RRSP). Registered investments qualify for annual tax-sheltered RRSP contributions. Non-registered
investments are subject to tax payments on the capital gains each year and
capital losses can also be claimed.
and executor’s fees and pass directly to the beneficiary. If the named beneficiary is a family member (such as a spouse, child, or parent), the investment may also be secure from creditors in case of bankruptcy. These protections apply to both registered and non-registered investments.
Canada
Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...
insurance companies in the form of individual, variable life insurance
Life insurance
Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger...
contracts offering certain guarantees to the policyholder such as reimbursement of capital upon death. As required by law, these funds are fully segregated from the company's general investment funds, hence the eponym
Eponym
An eponym is the name of a person or thing, whether real or fictitious, after which a particular place, tribe, era, discovery, or other item is named or thought to be named...
. A Seg Fund is synonymous with the U.S. insurance industry "separate account
Separate account
A separate account is a segregated accounting and reporting account held by an insurance company not in or "separate" from its general account. A separate account allows an investor to choose an investment category according to his individual risk tolerance, and desire for performance...
" and related insurance and annuity products.
Usage
A segregated fund is an investment fund that combines the growth potential of a mutualfund 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
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
, debenture
Debenture
A debenture is a document that either creates a debt or acknowledges it. In corporate finance, the term is used for a medium- to long-term debt instrument used by large companies to borrow money. In some countries the term is used interchangeably with bond, loan stock or note...
s, and stock
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
s. The value of the segregated fund fluctuates according to the market value of the underlying securities
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
.
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 non-registered (not held inside an
RRSP). Registered investments qualify for annual tax-sheltered RRSP contributions. Non-registered
investments are subject to tax payments on the capital gains each year and
capital losses can also be claimed.
Insurance Contracts
Segregated funds are sold as deferred variable annuity contracts and can be sold only by licensed insurance representatives. Segregated funds are owned by the life insurance company, not the individual investors, and must be kept separate (or “segregated”) from the company’s other assets. Segregated funds are made up of underlying assets that are purchased via the Life assurance companies. Investors do not have ownership share. Segregated Funds have guarantees and run for a period. Should the investor leave before the end date, he/she may be penalized.Maturity Dates
All segregated fund contracts have maturity dates, which are not to be confused with maturity guarantees (outlined below). The maturity date is the date at which the maturity guarantee is available to the contract holder. Holding periods to reach maturity are usually 10 or more years.Maturity & Death Guarantees
Guarantee amounts are offered in all segregated funds whereby no less than a certain percentage of the initial investment in a contract (usually 75% or higher) will be paid out at death or contract maturity. In either case, the contract holder or their beneficiary will receive the greater of the guarantee or the investment’s current market value.Potential Creditor Protection
Granted certain qualifications are met, segregated fund investments may be protected from seizure from creditors. This is an important feature for business owners or professionals whose assets may have a high exposure to creditors.Probate Protection
If a beneficiary is named, the segregated fund investment may be exempt from probateProbate
Probate is the legal process of administering the estate of a deceased person by resolving all claims and distributing the deceased person's property under the valid will. A probate court decides the validity of a testator's will...
and executor’s fees and pass directly to the beneficiary. If the named beneficiary is a family member (such as a spouse, child, or parent), the investment may also be secure from creditors in case of bankruptcy. These protections apply to both registered and non-registered investments.
Reset Option
A reset option allows the contract holder to lock in investment gains if the market value of a segregated fund contract increases. This resets the contract’s deposit value to equal the greater of the deposit value or current market value, restarts the contract term, and extends the maturity date. Contract holders are limited to a certain number of resets, usually one or two, in a given calendar year.Cost of the Guarantees
The shorter the term of the maturity guarantees on investment funds - whether they are segregated funds or protected mutual funds - the higher the risk exposure of the insurer and the cost of the guarantees. This inverse relationship is based on the premise that there is a greater chance of market decline (and hence a greater chance of collecting on a guarantee) over shorter periods. A contract holder's use of reset provisions also contributes to costs, since resetting the guaranteed amount at a higher level means that the issuer will be liable for this higher amount.See also
- Life insuranceLife insuranceLife insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger...
- Universal life insuranceUniversal life insuranceUniversal life insurance is a type of permanent life insurance based on a cash value. That is, the policy is established with the insurer where premium payments above the cost of insurance are credited to the cash value of the policy...
- Variable universal life insuranceVariable universal life insuranceVariable Universal Life Insurance is a type of life insurance that builds a cash value. In a VUL, the cash value can be invested in a wide variety of separate accounts, similar to mutual funds, and the choice of which of the available separate accounts to use is entirely up to the contract owner...
- Unitised insurance fundUnitised insurance fundUnitised insurance funds or unit-linked insurance funds are a form of collective investment offered through life assurance policies.An insurance company's contract may offer a choice of unit-linked funds to invest in. Insurers that offer these contracts are mainly found in the UK and British Isles...