22.2.3 Segregated Fund Features

22.2.3 Segregated Fund Features

SEGREGATED FUND FEATURES

Segregated funds offer investors a variety of unique features, including maturity guarantees, death benefits, and creditor protection.

MATURITY GUARANTEES

Maturity guarantees are a fundamental contractual right associated with segregated funds, providing assurance that the contract holder or the beneficiary will receive at least a partial guarantee of the money invested. Provincial legislation requires the maturity guarantee to be at least 75% of the amount invested over a contract term of a minimum of 10 years or upon the death of the annuitant.

To provide greater capital protection, some insurers also offer a 100% guarantee, often linked to longer terms, such as 15 years. These options come with a higher management expense ratio (MER) due to the increased risks associated with offering full maturity protection after 10 years. Flexible guarantee options may also be provided by insurers, varying from combinations like 75% maturity guarantee and 75% death benefit to 100% maturity guarantee and 100% death benefit.

AGE RESTRICTIONS

Insurance companies providing maturity guarantees exceeding the statutory 75% often impose age restrictions. For example, the individual on whose life the death benefits are based must typically be younger than 80 years when the policy is issued. Alternatively, the contract holder might receive reduced protection as the annuitant ages.

RESET DATES

Reset dates provide flexibility to renew segregated fund contracts upon expiry of the initial 10-year term, depending on the annuitant’s age. A contract reset locks in the current market value and establishes a new maturity date. Resets can be frequent, ranging from daily to annually, with daily resets offering particular advantages in both rising and falling markets.

DEATH BENEFITS

Death benefits ensure that the contract holder’s beneficiary or estate receives a guaranteed amount in the event of death. The benefit is calculated as the difference between the guaranteed amount and the net asset value of the fund at the time of death.

Example

Keith purchases a segregated fund contract for $100,000 and names his wife, Patricia, as the beneficiary. With a 75% guarantee at death, the guaranteed amount is $75,000. Upon Keith’s death in the fifth year, the market value of the fund is $80,000, which Patricia receives because it exceeds the guaranteed amount.

Conversely, Ayida with the same purchase and contract terms names her son, Antoine, as the beneficiary. She dies in the fifth year with the market value of the fund at $65,000. Antoine then receives the guaranteed amount of $75,000, comprised of the $65,000 market value and an additional $10,000 as death benefit.

Table 22.1 | Death Benefits Total Amount Paid

Guaranteed Amount	Market Value at Death	Death Benefit	to Beneficiary
$10,000	$8,000	$2,000	$10,000
$10,000	$9,000	$1,000	$10,000
$10,000	$10,000	None	$10,000
$10,000	$11,000	None	$11,000

CREDITOR PROTECTION

Segregated funds provide unique protection from creditors as exacted through their ownership by insurance companies, making them excludeable under bankruptcy legislation.Creditor protection is advantageous for clients vulnerable to debt recovery actions, including business owners and entrepreneurs. However, this protection is conditional. For it to apply, the purchase must be made in good faith and the contract should specify a named beneficiary.

BYPASSING PROBATE

Segregated fund contracts allow the estate to avoid probate, transferring proceeds directly to beneficiaries. This bypass reduces potential delays and fees associated with the settlement of the estate.

COST OF THE GUARANTEES

The costs associated with segregated funds include typical mutual fund expenses and additional costs for death benefits and maturity guarantees. Assessing the complete value of these insurance features can be challenging. Generally, segregated funds entail higher management expense ratios than comparable mutual funds.

BANKRUPTCY AND FAMILY LAW

Federal bankruptcy law usually excludes segregated funds from property divided among creditors. However, under certain conditions outlined in the Bankruptcy and Insolvency Act, proceeds may be subject to seizure, e.g., if the purchase occurred one year before bankruptcy or while the contract holder was legally insolvent within five years of the purchase.

GLOSSARY

• Segregated Fund: A type of investment fund legally wrapped in an insurance contract and providing unique benefits compared to mutual funds.
• Maturity Guarantee: The protection that an investment will retain a certain minimum value upon financial maturity or a set holding period.
• Death Benefit: A payout to beneficiaries upon the policyholder’s death, ensuring the investment reaches a guaranteed minimum value.
• Creditor Protection: Safeguards preventing court-ordered asset seizure within bankruptcy proceedings due to the segregated ownership by the serving insurance company.

KEY TAKEAWAYS

• Segregated funds come with unique features such as maturity guarantees, death benefits, and creditor protection.
• Maturity guarantees offer reassurance of retaining a significant portion of the invested amount over a designated period.
• Death benefits provide comfortable financial assurances for beneficiaries.
• Creditor protection makes segregated funds a safer investment choice for debt-vulnerable individuals.
• Segregated funds are beneficial for estate planning by bypassing probate