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Life
insurance companies can sell investment fund insurance products,
called individual variable insurance contracts or segregated fund policies. This investment and insurance product
deserves attention when both short-term and long-term investing is
considered.
On the
one hand, segregated fund policies are investment vehicle that pooled investments of many people, like
mutual funds. When investor buys segregated fund policy, he/she
places his/her capital on deposit in a life insurance contract, and
then this money is invested in units of one or more of the “family”
of segregated funds offered by the insurer. In turn, each of
the segregated funds invests in a range of investments
- a broader range than individual investor could buy on his/her own.
The assets of these funds must be kept and managed separately
(segregated) from the general assets of the life insurance company.
On the
other hand, segregated fund policies are insurance contracts,
therefore, they offer a variety of benefits that mutual funds do not
have: maturity guarantee, death benefit guarantee,
probate bypass opportunity, potential
creditor protection, insurer insolvency protection.
As segregated funds have benefits mentioned above this kind of
investments may meet requirements of different
investors:
-
Conservative
investors - Even the most adverse investors can participate in the
growth potential equity market while of the keeping in mind that their principal investment has a measure
of protection.
-
Business Owners,
Executives, Professionals - The personal assets of many business
owners face exposure to potential creditors. Professionals may also
be subject to personal liability.
-
Investors in Poor
Health - Traditional life insurance may not be obtainable. Usually,
segregated funds guarantee 100% of the investor's premiums upon
death without asking any health related questions.
-
Retirement Savings
and Income Options - Segregated fund guarantees may help to ensure
that the investor's retirement savings will be there when it is
needed.
To purchase units of segregated fund technically means to
make a deposit or premium payment according to a contract that an
investor must establish with insurer. Lump sum and periodic
investment plans as low as $50 per month are available for some
segregated funds. Each fund has a unit price that generally
changes daily. Your invested money buys a certain number of units
that is determined by the unit price on the day your purchase takes
effect.
Depending on your
risk tolerance, financial situation and investment goals, you
can invest in segregated funds that vary a lot in terms of the safety of
your money and potential return. There are some of them:
Money market funds invest in very safe, short-term investments such as government bonds
and treasury bills. Because they are very safe, you can't expect to
earn a lot.
Fixed income funds buy investments that pay a fixed rate of return. The products
include bonds, debentures, mortgages, and corporate shares that make
regular payments. They are riskier than money market funds and the
price can go up and down. But they are still a pretty safe
investment.
Growth or equity
funds invest in a variety of stocks. Some funds invest
more in the 'blue-chip' companies - larger companies that have a
good track record. Other equity funds may invest in smaller, younger
companies that look promising. Because they are designed to "grow"
faster than money market or fixed income funds, you have to accept a
bigger risk that you could lose some of your money.
Balanced funds invest in a mix of equities, fixed income, and money market. They
try to balance the desire to see money grow against the risk of
losing some of the money. Most of these funds will have a target
split among the different types of investments, and they will stick
pretty close to that split.
Specialty funds
focus on investing in a certain part of the world (for example,
Asia), or in a certain industry (for instance, high tech companies).
They may focus on an "emerging market", like Eastern Europe. These
funds sometimes have very high returns. At the same time, you have
to accept that they are the most likely to lose money.
Commodity Funds the most speculative of funds, invest in such derivatives as stock
options and futures. These funds are highly volatile and offer
investors the highest potential for returns – with the highest
element of risk.
Index funds will match the changes in a certain market, such as the Toronto
Stock Exchange (TSX), or in a certain grouping of stocks. The value
of the units in the fund will change, up or down, as the exchange
index goes up or down. There are many index funds available. These
funds may track a large number of stocks (such as all the companies
listed on the TSX), or they may track a selection of companies. For
example, the S&P/TSX60 tracks the 60 biggest companies on the TSX.
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