22.1.1 Definition and Structure

Overview of Segregated Funds

Segregated funds represent a unique hybrid of investment and insurance products offered primarily by Canadian life insurance companies. They are designed to provide investors with both the growth potential associated with mutual funds and the added security benefits of an insurance policy. These products are structured as individual variable insurance contracts and are often used as estate-planning tools due to their ability to combine investment elements with protected insurance benefits.

Key Characteristics of Segregated Funds

1. Investment Composition: Segregated funds are similar to mutual funds in that they pool the money of many investors to purchase a diversified portfolio of securities. However, the fund’s assets are held within a separate account of the insurance company, which segregates them from the general assets of the company.

2. Insurance Component: Unlike mutual funds, segregated funds offer policyholders a unique set of insurance benefits. This includes a guarantee on a percentage of contributions at maturity or upon the death of the policyholder, specifically known for providing a sense of security to investors concerned with market volatility.

Contractual Guarantees

A distinguishing feature of segregated funds is their contractual guarantees, which are not available in traditional mutual funds. These guarantees include:

1. Maturity Guarantees:

   • Typically guarantee between 75% to 100% of the invested principal (less any withdrawals) will be returned after a specified period, often 10 years.
   • This feature provides investors with a level of downside protection, reducing the risk of market exposure over time.

2. Death Benefit Guarantees:

   • This ensures beneficiaries receive a guaranteed minimum payout if the policyholder dies before the maturity date.
   • Typically set at a similar amount to the maturity guarantee, it safeguards the original contributions against significant market downturns.

Additional Features

• Creditor Protection: Under certain conditions, segregated fund assets may be protected from creditors, making them appealing to business owners and professionals.
• Bypassing Probate: With designated beneficiaries, the proceeds from segregated funds can bypass the probate process, facilitating quicker transfer and reduced estate taxes.

Regulations and Compliance

Segregated funds are subject to regulations under the Canadian life insurance industry rather than securities regulations. Compliance is governed by the Insurance Companies Act and overseen by bodies such as the Office of the Superintendent of Financial Institutions (OSFI). Advisors selling segregated funds must hold appropriate licensure in life insurance and must adhere to regulations specific to these investment insurance products.

Visual Representation

    graph TD
	    A[Segregated Fund] --> B[Investment Composition]
	    A --> C[Insurance Component]
	    B --> D[Similar to Mutual Funds]
	    B --> E[Separate Accounts]
	    C --> F[Maturity Guarantee]
	    C --> G[Death Benefit Guarantee]
	    C --> H[Creditor Protection]
	    C --> I[Bypass Probate]

Glossary

• Segregated Fund: An investment product offered by life insurance companies combining elements of mutual funds and insurance.
• Maturity Guarantee: An assurance that a certain percentage of the principal investment will be returned after a set period.
• Death Benefit Guarantee: A provision that ensures beneficiaries receive a minimum payout upon the policyholder’s death.
• Probate: The legal process of verifying a deceased person’s will.

Additional Resources

• Financial Consumer Agency of Canada: Offers guides on insurance products.
• Canadian Life and Health Insurance Association: Source for further reading on insurance regulations.

Summary

Segregated funds are highly distinctive financial instruments that integrate investment and insurance, offering unique benefits such as contractual guarantees, potential creditor protection, and probate efficiency. Understanding segregated funds’ role in financial and estate planning is crucial for professionals advising clients in achieving both their investment goals and legacy planning objectives. With these benefits, they provide an attractive option for risk-averse investors who seek the dual benefits of growth potential and insurance protection in the Canadian market.