Have you been offered a segregated fund but weren’t quite sure what it was? At the core, these are an investment product sold by life insurance companies.
Segregated funds in Canada are similar to mutual funds, in that they’re a collection of underlying funds that you pay into, which are managed by professionals. But unlike mutual funds, they tend to have insurance benefits, your contributions are mostly guaranteed, and they have higher fees.
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Here’s everything you need to know about segregated funds in Canada.
What are segregated funds?
Segregated funds are an investment product sold by life insurance companies. They combine the growth-potential of investing with the protection of insurance.
You begin by buying into a segregated fund directly through the insurance company. Your money will then contribute to a pool of funds that’s then invested in different underlying assets, kind of like a mutual fund. It’ll be managed by the insurance company.
What are the features of segregated funds?
It’s important to note that segregated funds tend to have higher fees and lower returns than other similar investment options, thanks to their complicated structure and non-aggressive fund objectives. They’re also contracts, meaning they often have strict terms that you’ll need to wait out, coupled with penalty fees if you try to withdraw your money early.
But they do have some exclusive perks you can’t get everywhere. First, your contributions are often guaranteed – usually about 75% of them, but it can go all the way up to 100%. That means you can be sure most (if not all) of what you contribute stays with you.
They also have a death benefit built in. That means that in the event that you pass away before your contract matures, the money in your segregated funds are passed on to your beneficiary – tax free and without dealing with probate fees.
Want to learn more about the basics of investing in Canada? Here’s the low-down for new investors.
4 pros of segregated funds
Segregated funds are an interesting way to invest your money, offering some special features not available with most other investment products.
1. Your principal investment is up to 100% guaranteed
One of the best parts of segregated funds is the fact that you usually get a guarantee between 75% and 100% of your principal.
This means that regardless of how the underlying funds do, once your contract matures, you’ll get back most of what you originally invested – and upwards of 100%.
2. Some have the option to lock in your gains
In addition to being a near-guaranteed investment, some segregated funds will even allow you to reset your guaranteed amount in the event that your fund is worth way more than when it started. That way, you can lock in your capital gains.
For example, say you originally invested $1,000 with a 100% guarantee for 10 years. Then, at the 5 year mark, your account is suddenly worth $5,000.
A fund with a lock-in option would let you reset your guarantee to be the full $5,000, instead of just the original $1,000. Then, once your contract matures, you’ll be guaranteed to get at least $5,000 back.
3. Built-in death benefit
Since segregated funds are so connected to life insurance, it’s not surprising that they have a death benefit attached to them.
If you assign a beneficiary to your fund, they’ll receive your guaranteed contributions if you pass away before your contract expires. This money will often go directly to them, tax free and without probate fees.
4. Could have creditor protection
In addition to the death benefit, the money in your segregated funds could be protected from creditors in the event of bankruptcy or even lawsuits.
3 cons of segregated funds
Despite their special features, segregated funds are lacking when it comes to more standard investing features like fees, returns, and liquidity.
1. Usually lower return than similar investment products
Segregated funds tend to not be very aggressive – and because of that, they’ll see lower returns. Of course, this can vary from fund to fund.
2. Can have higher fees as well
Something that is more common among segregated funds is their higher fees and MERs, especially when compared to mutual funds.
Though the extra insurance benefits are nice, these fees help cover their costs – so you’ll have to decide if they’re worth paying a bit more.
3. Locked in a contract
Finally, segregated funds are most often contracts with fixed terms. You can’t get at your money before your maturity date, unless you want to face early withdrawal penalties. You’ll also forfeit your guarantees if you withdraw early.
How to invest in segregated funds
Because segregated funds aren’t traded on the public markets, you’ll have to buy them through the insurance companies themselves.
Here’s a look at 5 of the most popular options in Canada, including the different contracts they offer:
| Company | Contracts | Interested? |
|---|---|---|
| Sun Life segregated funds | 3 types: * Sun GIF Solutions * Sun Lifetime Advantage GIF * Sun Protect GIF | Learn more |
| Manulife segregated funds | 6 types: * GIF Select InvestmentPlus * Manulife Private Investment Pools * Manulife PensionBuilder * Manulife RetirementPlus * Manulife Segregated Fund Registered Education Savings Plan * Manulife Ideal Signature Select | Learn more |
| RBC segregated funds | 28 types, including: * Money Market * Fixed Income * Balanced * Canadian Equity * North American Equity * U.S. Equity * International and Global Equity | Learn more |
| BMO segregated funds | 10 types, not listed | Learn more |
| Canada Life segregated funds | Broad range, not listed | Learn more |
** Please note that the information within this table was accessed on March 29, 2021.
As you can see, some companies outline all the information for you (like with RBC segregated funds and Sun Life segregated funds), while others funnel you towards speaking with an advisor. It’s also good to note that firms tend to refer to segregated funds as Guaranteed Investment Funds or GIFs.
In any case, speaking with an advisor is likely your safest bet if you want to make serious investments in segregated funds.
Want to make sure you’re not getting ripped off by your financial advisor? Look out for these warning signs.
Segregated funds alternatives
Not completely sold on segregated funds? Here are a couple common alternatives.
Segregated funds vs. mutual funds
Just as Canada Life looks at mutual funds vs. segregated funds, we will too – because there are good reasons why this comparison is frequently used when considering segregated funds.
Basically, both are investment products that involve a pool of funds being controlled by a singular person or firm. This money is invested in a variety of underlying funds, and the return is split between all contributors.
But that’s about where the similarities more or less end.
Mutual funds have lower fees and have more varied purposes in mind, so you tend to have more choice when it comes to what type of investment you’re making.
Segregated funds, on the other hand, come with special features like maturity and death benefit guarantees, but usually have higher fees and lower returns. They’re also always contract based, whereas you’re more likely to be able to withdraw whenever you want with mutual funds.
Segregated funds vs. ETFs
On the flip side of the coin, ETFs are very different from segregated funds – but they’re also a much easier and cheaper way to invest your money.
They, too, are a combination of different investment products, combined together in one purchase. But they’re traded on public markets, just like stocks and unlike seg funds. This means the fees are lower and the return – though more volatile – could also be higher.
And instead of going through an investment firm to buy them, they’re available to purchase through online brokers – or even in a set-it-and-forget-it approach with a robo advisor.
Here are some example robo advisors to take a look at:
| Robo advisor | Fees | Interested? |
|---|---|---|
| Wealthsimple | * Under $100k: 0.5% * Over $100k: 0.4% * Average MER of 0.2% |
Learn more |
| CI Direct Investing | * First $150k: 0.6% * Next $350k: 0.4% * Above $500k: 0.35% * MER between 0.17% and 0.19% |
Learn more |
| Questwealth (from Questrade) | * Under $100k: 0.25% * Over $100k: 0.2% * MER between 0.17% and 0.22% |
Learn more |
Will you invest in segregated funds?
When buying life insurance, the possibility of purchasing a segregated fund may be thrown around. Now you’ll have a better idea of what that actually means for you.
Do you have a segregated fund? Would you recommend it?
Let us know in the comments below.
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$25 GeniusCash + Delicious meal choices with fresh ingredients + Front-door delivery.FAQ
What are segregated funds?
Segregated funds are an investment fund sold by investment companies. They offer extra insurance benefits, like maturity and death benefits, but also tend to have higher fees and lower flexibility than a mutual fund. Learn more here.
Are segregated funds different from mutual funds?
Yes, seg funds are sold specifically by insurance companies and have fixed terms and higher fees than mutual funds. They also offer unique benefits, like a maturity guarantee. See more alternatives here.
What are the pros and cons of segregated funds?
The pros of segregated funds are that they often have principal investment guarantees up to 100%, have the option to lock your gains, offer creditor protection, and come with a death benefit. On the flipside, the cons are that they often have higher fees, lower return, and aren’t very liquid.
How do I invest in a segregated fund?
Unfortunately, it’s not as easy to invest in segregated funds as with other options. Since these funds are only available through insurance companies, you’ll have to purchase directly from the company. Some of the top companies offering segregated funds in Canada are Sun Life, Manulife, RBC, BMO, and Canada Life.
What are the segregated fund alternatives?
Two major alternatives of segregated funds are mutual funds and ETFs. Learn more here.
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