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Things you should know about Segregated Funds

Have the past 6 months made you stop and think? Will you be ready when the next wave of recession and uncertainty happens?

Since March and the beginning of the COVID disruption, I have spent most of my time talking with my clients, assuring them that their investments in their Segregated Funds and their Insurance Programs are safe and sound. 

What are Segregated Funds? According to the Insurance Act of Canada, under section 451:

 “A life company that issues policies described in section 450 or accepts or retains amounts so described shall, in respect of those policies or amounts,

       (a) maintain separate accounts; and

       (b) establish and maintain one or more funds consisting of assets that are segregated from the other assets of the company and that are specified as the assets on         the market value of which the liabilities of the company in respect of those policies or amounts depend.

 Segregated Funds are the insurance companies’ mutual funds, but unlike mutual funds, they  are “segregated” from the operating capital of the insurance company so that in the event of a bankruptcy or other calamitous event, these funds are not affected and remain the property of the policy owner.

Why Segregated Funds? 

  1. In addition to the above advantage, if you are a professional or self-employed, protecting yourself from creditors should be a priority. Creditor Protection is a potential benefit of Segregated Funds for your RSP’s and your Non-Registered investments.
  2. If you are retired and/or doing estate planning, being able to bypass Probate is a sound and prudent idea. Probate costs, when you factor in the legal, accounting and tax costs can easily amount to 10% or more of your estate value. On death, investments that are not inside Segregated Funds are frozen until the estate is “Probated”, which could be a year or more. Held inside a Segregated Fund, your investments will be paid to your beneficiaries within 30 days without any of the related Probate costs.
  3. A Will is a public document and as such, anyone can access it and see who your beneficiaries are and what they receive. Segregated Funds are “Private” and so nobody except you, the beneficiary and those you have chosen to tell will know any of those details.

There is a lot of misinformation about Segregated Funds, especially by individuals and organizations who are not licensed to sell them and one of the most common of the misnomers is the cost. All mutual funds and Segregated Funds have management expense ratios (MER) which gradually reduce as the investment grows. The MER for a Segregated Fund at the highest end is .30% and this added cost makes the Segregated fund a life insurance policy under the Act. New designs of Segregated Funds actually have lower MER’s than their corresponding mutual funds now.

Let’s talk! You may want to discover the guaranteed death benefit of a Segregated Fund too!

Call 905-430-7921