Why do segregated funds have higher management expenses?


What the higher expense pays for 

The insurer holds a reserve in relation to the several guarantees provided in the policy contract. Due to market fluctuations, it is especially important that actuaries calculate and hold reserves needed to pay any future liability due to a capital loss.

Guaranteed Capital Protection Because of the need to assess and insure the portion of capital guaranteed, insurers must be involved. A slightly higher management expense ratio (MER) pays for these capital-conserving features.

Retirement planning advantage Some segregated fund policies allow for additional insured security, promising that a pre-established monthly payment of segregated fund premiums (i.e., investments) will continue on your behalf in the event of a disability. Consider how valuable this pledge would be to your retirement if you could no longer work.

How simple is it to invest in segregated funds?



You may want to consider using segregated funds when the market is offering low snail-paced returns on guaranteed term deposits.

The following advantages, make investing in segregated (seg) funds simple:

  • Invest in stocks when interest rates are low Interest rates on term deposits pay a very low percentile return per year, whereas the stock market can grown rapidly.
  • Simplified investing You can select an industry or sector, for example, without having to hand-pick each security. The segregated fund manager does this selection process for you. You don’t have to be assessing which stock or bond may or may not be a winner. A seg fund manager is trained to weigh out all the market contingencies which can affect investor performance.
  • Low-cost diversification A small monthly purchase plan can have you moving forward in your segregated fund investments in a day. Your money can buy a piece of many different investments held within one or more funds.
  • Dollar-cost averaging Dollar-cost averaging allows you to buy more seg fund units when the unit values are down, less when they are high, giving you some benefit from downward volatility.
  • Flexible access to your money You can sell your seg fund shares in one day. Your proceeds are available the next day if your money is needed in the short term.
  • Portfolio balancing Choices include the full range of seg fund types and strategies which are available to use such as strategic balancing of your funds holdings.
  • Automatically invest You can automatically invest more in segregated funds at any time or use dollar-cost-averaging.
  • Professional management Segreaged funds have active professional management watching over your investment
  • Segregated funds also offer some certainties Some guarantees are offered or optional as far as principal retention goes or the investor, which are quite different than segregated funds, which may differ according to the segregated fund policy.

Talk to your advisor about how you might benefit from the use of seg funds in your investment planning strategies.


How can Segregated Funds benefit an investor?


How Segregated (Seg) Funds Work

Segregated (seg for short) funds are professionally managed investment funds holding pooled investments, with a life insurance component.

With predefined investment objectives and policies, a professional manager selects the assets the seg fund will hold. Many individuals pool their money for the purpose of investing in stocks, bonds, and other kinds of securities by purchasing shares or units. The price per unit fluctuates in relation to the market price of the securities the fund holds.

Fund investors get a share of the fund’s ongoing investment earnings or losses, based on the number of units they own. When they redeem or sell units, the redemption value or price they get depends on the number of units redeemed, the unit price at the time of redemption, and any applicable fees.

The advantages of segregated funds during market turbulence Seg funds can offer growth when the market increases in value. Seg funds allow investors who have only a little capital or limited investment knowledge to invest in a diversified portfolio of assets. Individual investors share the expenses of running the fund, such as employing a professional manager who buys and sells assets. They are very liquid; in other words, individual investors can cash out at virtually any time by redeeming their units with the fund issuer.

1. Diversity can reduce investor risk The more diversified a fund is, the greater the mix of assets it holds in its investment portfolio. As with all investment products, there are various kinds of investment risk, such as inflation risk, declining market risk (referred to as bear market), default risk, currency risk, interest rate risk, and political risk.

2. Safeguards certainties The most compelling reason for buying a seg fund policy is capital protection. While GICs also offer a guaranteed return, they are limited in their growth potential. Since seg funds are invested in capital markets, they have a greater capacity for appreciation. Segregated fund contracts have special features offering certainties over and above those offered by other investment funds.

3. A maturity benefit The seg fund’s contract at maturity date, or at death, may guarantee a minimum percent of your invested capital to be returned (by a life insurance company). Typically, at the time of maturity set in the contract, some companies permit a resetting of the new guaranteed capital amount and a renewed maturity date.

4. Money security options Regardless of market performance, at maturity you are entitled to receive most or all of your initial invested capital back (or more if the market has performed well), less any withdrawals. Note: Examine the conditions of the contract.

6. Estate planning benefits As with the certainties of the maturity benefit, some insurance companies allow individual contract owners to reset the death benefit periodically to lock in increases in the value of the segregated funds the contract has invested in, equal to at least a percentage of gross contributions.

This benefit is payable directly to the beneficiary of the contract upon the death of the insured person. If a beneficiary is named and the death benefit paid to him or her, monies can be protected from probate, government estate administration fees, and any attending legal fees incurred.

7. Why seg funds appeal to senior investors This is of particular value when an investor is nearing, or has begun, retirement and cannot afford to lose capital invested during a volatile market. Even if the fund’s actual unit value declined, your seg fund investment contract may guarantee that you will get back a very high percentage of the initial capital invested.

Also, at maturity, you will get back the guaranteed minimum amount or, if the market has risen in value, a higher amount. This means less worry, as you will know with certainty the minimum amount of money you will have when the contract matures (some return up to 100% of the original capital invested). This is particularly good for those who intend to pass the money on to the next generation if it is not needed for income or emergency during any period of market devaluation.

8. One or more beneficiaries Segregated fund policies allow you to designate one or more beneficiaries, much like a life insurance policy. At the time of your death, the proceeds from your seg policy may not be included with the rest of your estate. The proceeds from your segregated fund policy pass directly to your beneficiaries.

Note: The provisions of a seg fund contract, such as the guarantee periods and the MER, may be dependent on age and insurance underwriting. There are many new seg funds being developed offering various guarantees (and periods related to those guarantees). You should note that individual contracts have their own restrictions on the age to which you can invest. In addition, the level of payout can vary depending upon your age.

9. Potention creditor-proof investments Depending on jurisdiction, some seg fund policies might be protected from creditors for an investor’s lifetime if the policyholder ever faced a lawsuit or bankruptcy. This is because seg funds include insurance-related contracts. There must be an irrevocable or preferred beneficiary (or multiple preferred beneficiaries)—a child, grandchild, parent, or spouse—named on the contract. This can be beneficial for self-employed small business owners who take more financial risk (such as consultants, dentists, lawyers, and accountants). Equally, since those who own a significant number of shares in a corporation or serve as an officer or director of a corporation may be liable if lawsuits are filed against that corporation, they also can benefit from this creditor protection. For example, a sexual harassment or environmental lawsuit could affect a small business owner or corporate officer. Losing a serious lawsuit can put both your business reserves and personal investments at risk.

Note: Subject to certain restrictions, these strategies should be discussed with a qualified financial advisor. The creditor protection is allowed as long as money was not placed in the seg fund with the intent to protect the capital from an impending financial crisis. In most cases, however, the creditor protection is valid when the lawsuit or bankruptcy (in the case of both personal and business situations) is unexpected. Recent court rulings have shown that creditor protection may not always apply. You should seek legal advice to determine under what circumstances (especially intentional quick-fix shielding of money) a seg fund policy might not offer such protection.

Seg funds are best suited for the investors involved in long-term  wealth creation and preservation of capital.

Capital protection appeals to a variety of people, including:

• Everyday investors who are conservative and yet want higher returns than GICs offer;
• Pre-retirees who need growth but can’t afford to lose money;
• Seniors who require estate protection and certain capital guarantees; and
• Businesspeople who have exposure to personal liability and want to protect their assets.


What income advantages can segregated funds offer?

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Segregated fund policies are unique insurance-related products with some guaranteed investment features that can benefit both your capital and income for years.

· Premiums are paid to the insurer for an insurance policy. These monies are allocated to segregated fund investment options.

· An investment manager then invests these premiums in the segregated fund. He invests in stocks, bonds or other assets, according to the fund’s stated investment objectives.

· Through the insurance policy, you can take advantage of unique benefits that can bring more certainty and flexibility to your financial strategies.

· Where a segregated fund invests in aggressive growth equities, there are some unique provisions that risk-averse investors may prefer. Often a portion of the capital invested may carry an agreement to be returned after the timing of maturity. Check the contract provisions which often include reinvesting options at certain junctures of time which also should be understood.

Guaranteed retirement capital and income

· Lifetime guarantee on your income Some policies offer some control over your retirement income by providing you an income for life. With a lifetime income benefit option, your income may not decrease regardless of how the segregated fund performs unless excess withdrawals are taken. This may give some protection against the risk of outliving your money, market volatility and inflation.

· Maturity guarantee on your capital Segregated fund policies provide some certainties to return a percentage of the premiums paid into the segregated fund (less a proportional amount of redemptions), depending on the product selected.

Make sure that you pay careful attention to the contract terms and time periods relating to any mention of a certainty regarding the return of a percentage of premiums paid. Go over this carefully with your advisor.

Segregated funds diversify your investment

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Segregated funds have their shares protected to a certain degree by insurance.

The insurance protection advantage The notable advantage is that some segregated funds offer to insure up to 75% or higher, of the principal invested in a segregated fund if held for a number of years, typically 10. Depending on the situation, there may be some creditor protection if an investor went bankrupt if he owns segregated funds.

Diversification advantage Segregated funds offer the investor the benefit of maximum diversification, with minimal exposure to any one stock. You pool your investment with the combined capital of other investors, which allows everyone to invest in many companies, not just focus on two or three larger stocks.

Segregated Fund managers usually diversify among at least 20 companies, investing no more than 10% of the fund’s total dollars into any one security.

Other advantages of Segregated Funds

• You can buy additional shares of a segregated fund at any time.

• An automatic purchase plan called dollar-cost averaging (DCA) lets you invest equal amounts at regularly scheduled intervals. You buy more fund shares when the prices are lower, fewer when prices are higher, thus averaging out the price of the shares purchased.

• Segregated fund contracts can be registered in RRSPs or RRIFs.

• Dividends, where applicable, are easily reinvested.

• Some fund companies allow transfers between their funds without charge.

• You can borrow against segregated fund assets (unless the contract is registered).