Segregated Funds Guarantees
Segregated (seg for short) funds
like mutual funds are pooled investments. But the insurance
component in seg funds provides the following basic differences
between segregated funds and mutual funds:
principal guarantee on death provides the policy beneficiary will be
guaranteed to receive, at the least, a part or all of the initial
invested capital (minus withdrawals) as specified in the seg fund
policy, upon the death of the life insured under the policy. In the
case of 75% guarantee, for example, the beneficiary will receive the
greater of the policy’s fair market value at the time of death, or
75% of the gross principal deposits to the plan to date of death.
Insurance companies may offer 75-100% death benefit guarantee.
principal guarantee available at maturity is essentially the same as
the death guarantee, except that the maturity option only applies at
a fixed date in the future, which must be not less than 10 years
after the date of the principal deposit.
policyowner has to surrender the policy before the 10-year period
the guarantee is null and he or she will receive only the policy’s
fair market value.
maturity, regardless of market performance, you are entitled to
receive most or all of your initial invested capital back, less any
withdrawals (or more, if the market has performed well). Legislation
states that at least 75% of the initial investment must be returned,
but some companies offer 100% maturity guarantee. Note: Examine the
conditions of the contract.
of particular value when an investor is nearing, or has begun
retirement, and cannot afford to lose any of the original capital
invested, in a volatile market. Even if the fund's actual unit value
declined, the seg fund investment guarantees that the
investor will get back a very high percentage of the initial capital
invested. This is just as agreed in the contract (some up to 100%).
Example. Peter invests $60,000 in segregated fund policy and names
his wife as plan beneficiary. The policy offers a 75% guarantee on
death and maturity. If at the time of Peter’s death, the plan is
worth $100,000, his wife will receive the full $100,000. If at the
time of Peter’s death, the plan is worth $40,000, his wife will
receive $45,000 (the guaranteed amount).
10 years the contract is worth $100,000, Peter will receive the full
$100,000. If in 10 years the plan is worth $40,000, Peter will
receive the guaranteed amount $45,000.
“Refreshed” (Reset) Guarantees at Death and Maturity
Refresher or reset option
allows the policyowner to re-establish the principal guarantee (for
death, or maturity, or both) at the current fair market value of the
assets of the segregated fund, rather than the amount of the
principal deposit. Normally, exercising the reset option restart the
10-year maturity period for the whole policy, as of the date of the
exercise of the option.
Example. Katie invested $60,000 in a seg fund policy three years ago
and received a 100% death and maturity guarantee on her principal
deposits, under term of her policy. Today, the investments in her
plan are worth $80,000. Because her policy has a reset option for
death and maturity guarantee, she is able to elect to refresh her
guarantee to the current level of $80,000.
at the moment of Katie’s death the fund had dropped to $70,000, her
beneficiary would receive $80,000 under the reset option.
10 years the value of her investments is less than $80,000, she will
receive guaranteed amount $80,000
Typically, at the time of maturity, some companies permit a
resetting of the new guaranteed capital amount, and a renewed
reset can be a valuable tool for investors with a longer time
horizon, or when funds appreciate significantly.
policies allow an investor to designate one, or multiple
beneficiaries much like a life insurance policy. At the time of
his/her death, the proceeds from the seg policy are not
included with the rest of his/her estate. The proceeds of the
segregated fund pass directly to a named beneficiary, and are
not subject to probate, lawyer's or executor's fees. (Not applicable
Potential creditor protection
Established under life insurance legislation, some seg fund
policies might be protected from creditors for an investor's
lifetime - if the policyholder ever faced a lawsuit or bankruptcy.
There must be an irrevocable, or preferred beneficiary (or multiple
preferred beneficiaries) - a child, grandchild, parent or spouse
named on the contract.
protection is allowed as long as money was not placed in the seg
fund with the intent to protect the capital from an impending
should seek legal advice regarding this issue.
the insurance company protection association, protects Canadian life
insurance policyholders against loss of benefits due to the
financial failure of a Member Company. Assuris guarantees that you will retain at least 85% of the
guaranteed amount on your segregated fund policy.
For policies that have a guaranteed amount of $60,000 or less,
you will retain 100% of your guarantee.