Page 235 - A Canuck's Guide to Financial Literacy 2020

235

Segregated Funds

Segregated funds are long term investment products, similar to mutual funds, but offered
exclusively by life insurance companies. The unique mechanism that differentiates
segregated funds from mutual is the fact that they come with a guarantee that limits the risk
for investors.

In addition to the guarantee that segregated funds offer, investors might also invest due to
other various advantages such tax benefits, diversification, professional management and
much more.

Guarantees of Segregated Funds

Segregated funds are known to provide two guarantees to protect investors from market
losses, a maturity guarantee and a death benefit guarantee.

Maturity Guarantee

On the maturity date of the contract, which is typically 10 years, the policy owner is
guaranteed to receive at least 75% of the amount that they deposited to the contract.

Example: Jim invested $10,000 in a segregated fund. Upon maturity, the investment had a
market value of $6,000. This amount is less than the maturity guarantee. Jim would be
receiving 75% of the initial deposit, which is $7500. The difference between $7,500 and
$6,000 is known as the top-up.
Death Benefit Guarantee

The death benefit guarantee would also provide the beneficiary an amount equal to at least
75% of the initial deposit. The only difference is that the death benefit applies throughout
the entire term of the contract. Depending on the insurance company, some companies
may offer 100% guarantees but you'll find that these contracts often have a longer time
horizon.

Example: Jim is 45 years old and recently purchased a $10,000 segregated fund contract
with 75% death benefit guarantee. At age 54, Jim passes away. At the time of death, Jim's
investment had a value of $13,000. Since $13,000 is greater than $7,500 death benefit
guarantee, Jim receives the greater amount.

If Jim's investment had fallen to $6,000 at the time of death, his named beneficiary on the
contract would've received $7,500.

As stated in our example above, if the value of the contract at maturity or death is less than
the guarantee, the insurance company will top up the difference. This is one unique desire
of segregated funds.