One question that is often posed to me is, “What’s the difference between a ‘segregated’ fund and a mutual fund?” On the surface they appear very similar in that you pool your money with other investors, under professional portfolio management, to share in the returns. Segregated funds though are issued by life insurance companies and are actually considered an insurance contract, unlike mutual funds where you own units in an investment pool.

One of the fundamental differences with a segregated fund is the guarantees provided to the purchaser.The first is a maturity guarantee, which is that after 10 years or more, the investor will be guaranteed a percentage of the original investment minus any withdrawals or the market value, whichever is greater.  There is also a death benefit which guarantees the beneficiary will receive a percentage of the original investment or the market value, whichever is greater. These guarantees may vary from 75-100% of the original investment depending on the product and the provider.

As with everything there is a cost associated with these guarantees, in that some segregated funds have a higher management expense ratio (MER) than mutual funds to cover off the cost of insuring the principal. And another way insurance companies have reduced the cost is by providing guarantees for only 75% of the original investment. Some investors are unwilling to accept the additional cost of the guarantees, feeling it is unlikely the market value of the fund would fall over any ten-year period. For other investors, especially those near or at retirement where preservation of capital is more important, the peace of mind that the guarantees provide far outweighs the little extra return they forego.

Another advantage of segregated funds is the market value or guaranteed value is paid directly to the beneficiary without going through probate. Also, segregated funds can provide potential creditor protection. Whether this protection holds up in court depends largely on how long you have owned the segregated fund.

Whether segregated funds are right for you depends on several factors. At PlanWright we are here to help you sift through the information so you can make the right investment decisions.