By Darcie Doell, Financial Advisor and Laurianne Osmak, CLU,CHS Financial Planner

Doell Osmak Wealth Management Ltd

Get acquainted with segregated funds

Dec 16, 2020 | 8:43 AM

An insurance-based investment that for some, is a perfect fit.

The financial world uses a language that can be confusing for people who don’t have a deep understanding of investing. It can be more difficult when it comes to a particular product they may have heard of, but don’t have a firm grasp on its intent or how it works. Segregated funds are a unique kind of investment product and getting acquainted with a few key terms can help boost your knowledge.

Segregated fund contract: A pool of investments held by an insurance company and managed separately from its other investments. A segregated fund contract combines the growth potential offered by a broad range of investment funds with the unique wealth protection and estate planning features of an insurance contract. Segregated fund contracts can help transfer wealth to the next generation quickly, privately, and cost effectively. They can also minimize exposure to risk through various guarantees, such as death and maturity guarantees, and provide potential creditor protection – all from a single product or insurance contract. But what do each of these terms mean? Let’s break it down:

Estate planning benefits: Because segregated funds are technically insurance contracts, they let investors name a beneficiary to allow the investment to bypass probate and the estate at death. Probate is a legal process that certifies the validity of a will and the authority of the executor(s) to facilitate the transfers of assets to heirs. It can take time – months, or even years – and in many cases, there are fees[1]. With segregated fund contracts, the money goes directly and quickly to the person who inherits the money (the beneficiary of the contract). While poor estate planning can erode your wealth for the next generation and cause distressing, potentially expensive delays, segregated fund contracts can help make sure your beneficiaries will receive their inheritance quickly and cost-effectively. They may also help to preserve confidentiality: wills can become public documents, and the information in them can be easily accessed. Segregated fund contracts are private[2].

Creditor protection: Segregated fund contracts have the potential to protect your assets from creditors. If a family class or irrevocable beneficiary[3] to the contract is named, the segregated fund contract may be protected from the owner’s creditors during his/her lifetime. Also, the death benefit is excluded from the owner’s estate as it is paid directly to the beneficiary, usually placing it beyond the reach of estate creditors. You can read more about estate planning and creditor protection and about how the regulations particularly apply in Quebec. More insights on the creditor protection for business owners is available here.

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Maturity guarantee: With a segregated fund contract, you’re guaranteed to receive at least 75 per cent of your deposits (or 100 per cent, depending on the contract), reduced for any withdrawals, when the contract matures. This is known as a maturity guarantee, and it applies at the maturity date (which occurs after a minimum number of years has elapsed or at a contract set date – for example, age 100 of the annuitant), even if markets decline during the contract period. And if markets rise, your savings grow. Some contracts even let you “reset” your maturity guarantee to lock in growth. This way, you get the opportunity to protect your capital along with growth potential.

Death benefit guarantee: Segregated fund contracts also include a death benefit guarantee. The guarantee can be up to 100 per cent of your deposit, again reduced for withdrawals, depending on the type of contract selected and the age of the annuitant when the product is purchased. Your named beneficiary, who can be anyone – a family member, friend or charity – receives the death benefit in the event of death of the last surviving annuitant. As with maturity guarantees, some contracts “reset” the death benefit guarantee to lock in growth.

Segregated fund fees: The guarantees and benefits of a segregated fund contract are a type of insurance, which you’re paying for. Segregated fund costs include management fees, insurance fees, operating costs and applicable sales tax. A contract might also include a charge for early withdrawal.

Segregated fund contract who’s who

Contract/policy owner: The person who enters into and owns a segregated fund contract.

Annuitant: In provinces other than Quebec, this is the person on whose life the duration of the contract, the maturity guarantee and death benefit guarantee are based. In Quebec this person is called the life insured (‘insured’) and the word ‘annuitant’ instead refers to the person who will receive any annuity payments while the annuitant/insured is alive (also known as the “payee” in provinces other than Quebec). Certain contracts use “annuitant” to designate the life insured in Quebec as well as the rest of Canada. Also, you are able to name a successor annuitant/insured in some segregated fund contracts, in which case the contract continues until both the annuitant/insured and successor annuitant/insured pass away. The contract owner is the person who will receive the funds at maturity of the segregated fund contract. The beneficiary is who will receive the funds when the last surviving annuitant/insured dies.

Beneficiary: The person(s) named on the segregated fund contract by the contract owner to receive the death benefit when the last surviving annuitant/insured passes away. Your beneficiary can be anyone – a family member, a friend, or a charity.

Insurance company: This is the company that you enter into a contract with and that backs the guarantees of the provisions in your contract.

Advisor: Your key contact! Advisors who are licensed to sell insurance (including segregated funds) can help you determine the segregated fund contract that’s suitable for your needs. An advisor can also help you decide on specific funds that are available in the contract.

The appeal of segregated fund contracts depends on a few key factors, such as time horizons, fees and estate benefits that differ from typical mutual funds or exchange traded funds. But what makes them unique could be what makes them the right type of investment for you. Speak with your advisor to see if a segregated fund contract is suitable for your investment strategy or needs.

By Laurianne Osmak, CLU, CHS Financial Planner & Darcie Doell, Financial Advisor; Doell Osmak Wealth Phone: 306-922-2020 Email: Darcie Doell, Wealth Advisor – darcie@dowealth.ca
Email: Laurianne Osmak, Wealth Advisor – laurianne@dowealth.ca Email: Michelle, Wealth Associate – michelle@dowealth.ca
Website: www.dowealth.ca

© 2020 Manulife. The persons and situations depicted are fictional and their resemblance to anyone living or dead is purely coincidental. This media is for information purposes only and is not intended to provide specific financial, tax, legal, accounting or other advice and should not be relied upon in that regard. Many of the issues discussed will vary by province. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation. E & O E. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the fund facts as well as the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Any amount that is allocated to a segregated fund is invested at the risk of the contractholder and may increase or decrease in value. www.manulife.ca/accessibility

[1] The probate process and fees do not apply in Quebec. There is a verification process for non-notarial wills but not for notarial wills.

[2] In Saskatchewan, jointly held property and insurance policies with a named beneficiary are included on the application for probate but do not flow through the estate and are not subject to probate fees.

[3] A family class beneficiary is the spouse, parent, child or grandchild of the annuitant. In Quebec, a married spouse, civilly unified spouse, descendant or ascendant of the policy owner is considered a family class beneficiary. When an irrevocable beneficiary is named, the beneficiary must authorize most contract changes. This restricts the owner’s ability to make changes or withdrawals from their own contract.