Segregated funds
An investment held inside an insurance contract: market growth, with a guaranteed floor at maturity and on death.
- 75% or 100%
- of your deposits guaranteed, at maturity and on deathof deposits guaranteed
- Outside your estate
- paid directly to the people you namepaid to the people you name
- Lock in gains
- with resets, without sellingwith resets
How it works
An investment inside an insurance contract
Insurance contract
You own this- Maturity guarantee
- Death benefit guarantee
- Named beneficiaries
- Potential creditor protection
Investment funds
Stocks, bonds or a mix, chosen by you and professionally managed. The value rises and falls with markets.
A segregated fund behaves much like a mutual fund. The difference is the wrapper around it.
- Offered only by life insurance companies, and sold only by licensed life insurance advisors.
- The assets are held separately, or “segregated”, from the insurer’s own money. That’s where the name comes from.
- You own the contract, not the fund units. Its value is tied to the funds you choose.
The guarantees
A floor under your savings
Both guarantees follow one rule: you receive the greater of the market value or the guaranteed amount. If markets do well, you get the market value. If they don’t, the guarantee is the floor.
Maturity guarantee
Hold the contract to its maturity date, often 10 or 15 years after a deposit, and you receive at least the guaranteed share of your deposits.
Death benefit guarantee
If you die, your beneficiaries receive at least the guaranteed share of your deposits, however markets have performed.
Common guarantee levels
- 75/7575% of deposits at maturity, 75% on deathLowest cost
- 75/10075% at maturity, 100% on deathModerate cost
- 100/100100% at maturity, 100% on deathHighest cost
Some contracts limit the higher levels by age at the time of deposit. Both guarantees are reduced by withdrawals.
An example
How Linda’s guarantees work
- Market value
- Death benefit guarantee
- Maturity guarantee
- Insurer top-up
Year 0: Linda invests $200,000
Linda is 63 and recently retired. She chooses a 75/100 guarantee with a 10-year maturity date and names her two children as beneficiaries. Death benefit guarantee: $200,000. Maturity guarantee: $150,000.
| Year | Market value | Death benefit guarantee | Maturity guarantee |
|---|---|---|---|
| Year 0 | $200,000 | $200,000 | $150,000 |
| Year 1 | $210,000 | $200,000 | $150,000 |
| Year 2 | $225,000 | $200,000 | $150,000 |
| Year 3 | $240,000 | $240,000 | $150,000 |
| Year 4 | $215,000 | $240,000 | $150,000 |
| Year 5 | $170,000 | $240,000 | $150,000 |
| Year 6 | $160,000 | $240,000 | $150,000 |
| Year 7 | $175,000 | $240,000 | $150,000 |
| Year 8 | $150,000 | $240,000 | $150,000 |
| Year 9 | $140,000 | $240,000 | $150,000 |
| Year 10 | $130,000 | $240,000 | $150,000 |
| Ending A, Linda dies in year 5: market value $170,000, guarantee $240,000, paid $240,000, insurer top-up $70,000. | |||
| Ending B, maturity in year 10: market value $130,000, guarantee $150,000, paid $150,000, insurer top-up $20,000. | |||
Linda is a fictional client. Illustration only: market values are after fees, taxes are ignored, and guarantee top-ups are generally taxable. Reset, age and maturity rules vary by contract.
Resets: locking in gains
Some resets are automatic, others must be requested. A maturity reset usually restarts the maturity clock: had Linda reset hers in year 3, her floor would have risen to $180,000, but her maturity date would have moved from year 10 to year 13. Age and frequency limits vary by contract.
What the guarantee is, and isn’t
- It is a floor on what you or your beneficiaries receive at maturity or on death.
- It isn’t a guaranteed rate of return. Your investment can still lose value in the meantime.
- It only applies at maturity or on death. If you cash out early, you receive the market value at that time, which may be less than you deposited.
Withdrawals
How withdrawals affect the guarantee
When you withdraw money, most contracts reduce the guarantee in proportion to the share of market value you take out, not dollar for dollar. Withdrawing during a downturn can shrink the guarantee by more than the cash you receive.
Fees
What you pay for the protection
The main cost is the Management Expense Ratio (MER), an annual percentage deducted inside the fund. The returns you see are already net of it.
The question isn’t whether segregated funds cost more. They usually do. It’s whether the protection and estate benefits are worth that cost in your situation.
Your estate
Paid directly to the people you name
When you name a beneficiary other than your estate, the insurer pays the death benefit directly to them. It doesn’t pass through your will.
Through your estate
- Will
- Probate
- Executor
- Beneficiaries
- Typical time
- Months, often more
- Privacy
- Court record
To a named beneficiary
- Insurer
- Beneficiaries
- Typical time
- Days or weeks
- Privacy
- Private
Probate fees
Assets that bypass the estate generally avoid probate fees. The saving depends on where you live: a few hundred dollars in Alberta, around $14,000 per $1 million in Ontario.
Potential creditor protection
With certain beneficiaries named, such as a spouse, child, grandchild or parent, the contract may be protected from creditors. It isn’t automatic, and it must be set up well before any financial difficulty.
Income tax still applies
Bypassing the estate doesn’t avoid income tax. Gains are generally taxed on the final return, unless they pass to a spouse.
The estate advantage is usually greatest for non-registered savings, since RRSPs, RRIFs and TFSAs can already name a beneficiary.
Is it right for you?
Who they suit, and who they don’t
The guarantees and estate benefits come at a cost: higher fees every year, and guarantees that only apply at maturity or on death. Whether that trade is worth it depends on who you are.
Often a strong fit
- Approaching or in retirement, keeping some growth without risking a major late loss.
- Estate-focused, wanting money to reach beneficiaries quickly and privately.
- Higher-probate provinces, such as Ontario and British Columbia, with non-registered savings.
- Business owners and professionals concerned about creditors, set up well in advance.
- Worried about market swings, and likely to sell at the wrong time.
Usually less suitable
- Younger investors with long horizons, who’d gain more from lower fees.
- Very fee-sensitive investors who value the guarantees little.
- Expecting to need the money before maturity, or planning big withdrawals.
- Simple estates, where assets already pass by designation or jointly.
Common questions
Segregated funds FAQ
Can I take money out of my segregated fund whenever I want?
Yes. You can generally withdraw at any time at the current market value. Keep in mind that withdrawals reduce your guarantees, and the maturity guarantee only applies if you hold the contract until the maturity date.
How are segregated funds taxed?
Inside a registered plan (an RRSP, RRIF or TFSA), the normal rules for that plan apply. In a non-registered contract, income and capital gains earned by the fund are allocated to you each year and reported on a tax slip, as with a mutual fund.
Unlike mutual funds, segregated funds can also allocate capital losses to you, which may be used to offset gains. If a guarantee tops up your value at maturity or on death, the top-up is generally taxable. We recommend confirming the tax implications with your accountant.
How do segregated funds differ from mutual funds?
A segregated fund invests much like a mutual fund: your money goes into professionally managed funds of stocks, bonds or both, and its value rises and falls with markets. The difference is the wrapper. A segregated fund is an insurance contract, governed by insurance legislation rather than securities legislation, offered only by life insurance companies and sold only by licensed life insurance advisors.
That contract adds a maturity guarantee and a death benefit guarantee, and lets you name beneficiaries who are paid directly, outside your estate. The protection costs more: fees are usually higher than for a comparable mutual fund. Segregated funds can also allocate capital losses to you, which mutual funds can’t.
Can I name more than one beneficiary on a segregated fund?
Yes. You can typically name several primary beneficiaries with set percentages, as well as contingent beneficiaries who would receive the benefit if a primary beneficiary has died.
What happens at a segregated fund’s maturity date?
You receive the greater of the market value or the guaranteed amount. Depending on the contract, you can then withdraw the money, renew into a new guarantee period, or move it elsewhere.
If an insurer fails. Segregated fund assets are held separately from the insurer’s own assets, and Assuris, the not-for-profit that protects Canadian life insurance policyholders, protects segregated fund guarantees, subject to its limits.
General information only, not personal financial, legal or tax advice. Features, guarantee levels, fees and rules vary by insurer and contract; the contract and its Information Folder govern. Any amount that is allocated to a segregated fund is invested at the risk of the contract holder and may increase or decrease in value.
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