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What are segregated funds

But what exactly are segregated funds? Well, they share some qualities with mutual funds, but they’re mainly sold by Canadian insurance companies and are not traded on a public market. That means that in order to buy a segregated fund, you’d have to purchase it directly from an insurance company. The fund basically consists of individual, variable insurance contracts that offer certain guarantees and advantages not available in traditional mutual funds. Think of it like investing in insurance that appreciates, except that instead of buying stocks you’re buying contracts, and do not represent ownership of the investment company through shares.

Advantages and disadvantages of segregated funds

Segregated funds can definitely form a productive part of a well-balanced investment portfolio, but it’s important to talk to the insurance provider you’re thinking of buying from in order to get all the information on the past performance of the fund, as well as any additional fees or conditions. And remember, past performance is never an indicator of future performance. Here are certain advantages and disadvantages you should consider if you’re interested in buying into segregated funds:


  • Your principal investment is protected:Because of the guaranteed payout that protects your initial investment, you know you’ll get 75% to 100% of your investment back, regardless of the market price at the time of the fund’s maturity date. Just remember that investments must be held until the date of maturity; if you withdraw before that, then you forfeit the guarantee.
  • Guaranteed death benefit:This is why segregated funds are also associated with life insurances (and why you should name a beneficiary on your policy). Upon your death, there’s a guarantee that 75% to 100% of your initial investment will be passed on to your beneficiary, tax free.
  • Easy estate transfer:Speaking of passing on assets to your beneficiary, any beneficiary named on the segregated fund will have the proceeds of the fund paid directly to them after your death, without having to deal with probate. Probate can be a lengthy and expensive process, so having the proceeds paid directly to your beneficiary can make a stressful situation much easier on your loved ones.
  • Potential creditor protection:If you’ve named a beneficiary to your policy, segregated funds also offer protection from creditors seizing your assets in case of bankruptcy or in the event of a lawsuit. As mentioned before, this might be particularly important for freelancers or small-business owners.
  • “Reset” options allow for more growth:Some segregated funds might offer a “reset” option, which is applied if the market value of your policy increases so significantly that you’d like to increase the amount covered in the guarantee (a.k.a. the amount you get back no matter what). This means you protect your initial investment, plus any gains the portfolio made. The only thing to keep in mind here is that hitting the reset button will also most likely extend the period of time you have to wait before you can access your money, usually an additional 15 years.


  • Limited liquidity:Because your money is locked in until the maturity date (otherwise you forfeit the guarantee of a return of principal investments), you really don’t have access to it unless you want to take a chance on receiving the current market value on your investment, which might mean a loss. There’s also a chance you’ll have to pay a penalty.
  • Higher fees:Compared to mutual funds, segregated funds usually have higher management expense ratios (MERs). In some cases, the fees can even reach of the total value of investments. That’s because the fees cover the cost of insurance features. You may also have to pay commission if the fund is bought or sold.
  • Early withdrawal penalties:If you decide to withdraw from the fund before the maturity date, you’ll likely have to pay a penalty, in addition to forfeiting any principal guarantee or a guaranteed death benefit.