A Segregated Fund (Seg Fund) is a type of investment fund administered by Canadian insurance companies in the form of individual, variable life insurance contracts offering certain guarantees to the policyholder such as reimbursement of capital upon death. As required by law, these funds are fully segregated from the company's general investment funds, hence the eponym.

Usage

A segregated fund is an investment fund that combines the growth potential of a mutual fund with the security of a life insurance policy. Segregated funds are often referred to as "mutual funds with an insurance policy wrapper".

Like mutual funds, segregated funds consist of a pool of investments in securities such as bonds, debentures, and stocks. The value of the segregated fund fluctuates according to the market value of the underlying securities.

Segregated funds do not issue units or shares, therefore a segregated fund investor is not referred to as a unitholder. Instead, the investor is the holder of a segregated fund contract. Contracts can be registered (held inside anRRSP) or non-registered (not held inside an RRSP). Registered investments qualify for annual tax-sheltered RRSP contributions. Non-registered investments are subject to tax payments on the capital gains each year and capital losses can also be claimed.

Features

Segregated funds are sold as deferred variable annuity contracts and can only be sold by licensed insurance representatives. Segregated funds are owned by the life insurance company, not the individual investors, and must be kept separate (or “segregated”) from the company’s other assets. Segregated funds are made up of underlying assets which are purchased via the Life assurance companies. Investors do not have ownership share. Segregated Funds have guarantees and run for a period should the investor leave before the end date they may be penalized.

All segregated fund contracts have maturity dates, which are not to be confused with maturity guarantees (outlined below). The maturity date is the date at which the maturity guarantee is available to the contract holder. Holding periods to reach maturity are usually 10 or more years.

Guarantee amounts are offered in allt segregated funds whereby no less than a certain percentage of the initial investment in a contract (usually 75% or higher) will be paid out at death or contract maturity. In either case, the contract holder or their beneficiary will receive the greater of the guarantee or the investment’s current market value.

Granted certain qualifications are met, segregated fund investments may be protected from seizure from creditors. This is an important feature for business owners or professionals whose assets may have a high exposure to creditors.

If a beneficiary is named, the segregated fund investment may be exempt from probate and executor’s fees and pass directly to the beneficiary. If the named beneficiary is a family member (such as a spouse, child, or parent), the investment may also be secure from creditors in case of bankruptcy. These protections apply to both registered and non-registered investments.

A reset option allows the contract holder to lock in investment gains if the market value of a segregated fund contract increases. This resets the contract’s deposit value to equal the greater of the deposit value or current market value, restarts the contract term, and extends the maturity date. Contract holders are limited to a certain number of resets, usually one or two, in a given calendar year.

The table of following is extracted from "Empire Life".