Segregated Funds Explained: Investing With an Insurance Guarantee
Segregated funds look like mutual funds but are insurance contracts, with guarantees at maturity and death. Here's how they work, what they cost and what to check before you invest.
Segregated funds are one of the topics we get the most questions about. They're sometimes described as "mutual funds with an insurance policy wrapped around them." That's a helpful starting point, but the details matter.
What is a segregated fund?
A segregated fund is an investment fund offered by a life insurance company through an insurance contract, often called an individual variable insurance contract. Your money is pooled and invested in assets like stocks and bonds, much like a mutual fund. The fund's assets are held separately ("segregated") from the insurer's own assets.
Because it's an insurance contract, it comes with features that ordinary mutual funds don't have. Here's how they compare at a glance:
Summary only, for general education. Features, fees and protections vary by product and account; the contract and fund documents always govern.
The key feature: guarantees
Segregated fund contracts include guarantees on the money you invest (less any withdrawals), typically between 75% and 100%:
- Maturity guarantee: if you hold the contract until its maturity date (often 10 years or more), you're guaranteed to get back at least the guaranteed percentage of your deposits, or the market value if that's higher.
- Death benefit guarantee: if you pass away, your beneficiaries receive at least the guaranteed percentage of your deposits, or the market value if higher.
Some contracts also offer resets, which lock in market gains to increase the guaranteed amount. The exact guarantee levels, timing, and how withdrawals reduce them all depend on the specific contract, so read the information folder and fund facts carefully.
See how a guarantee works when markets rise or fall. Drag the slider:
Interactive illustration
How do the guarantees work?
Simplified illustration for general education, not a recommendation or a quote. It assumes no withdrawals and no resets, and treats the market value as after fees. Withdrawals usually reduce guarantees in proportion. Maturity guarantees apply only on the contract's maturity date, often 10 years or more after deposits. Guarantee levels, fees and conditions vary by contract; the information folder and contract always govern.
Other features people consider
- Estate planning: when a beneficiary is named, the death benefit is generally paid directly to them. This can bypass the estate, which may avoid probate fees and delays.
- Potential creditor protection: in certain circumstances, for example when a family-class or irrevocable beneficiary is named, a segregated fund contract may be protected from creditors. This isn't absolute and depends on the facts and applicable law.
- Industry protection: if a Canadian life insurer were to fail, Assuris protects segregated fund guarantees up to $100,000 or 90% of the guaranteed benefit, whichever is higher.
The trade-offs
- Higher fees. The guarantees and insurance features cost money. Segregated funds generally have higher ongoing fees than comparable mutual funds, and those fees reduce your returns.
- The value still goes up and down. Before maturity or death, your contract's value moves with the markets. The guarantee only applies at the specific maturity or death benefit dates.
- Long time horizon. Maturity guarantees reward patience. Money you'll need in a few years may not be a good fit.
- Withdrawals reduce guarantees, usually in proportion to the amount taken out.
Questions to ask before investing
Tick each one off as you think it through:
Self-check
0 of 5 considered
Can I leave this money invested until the maturity date?
Maturity guarantees only apply on the maturity date, which is often 10 years or more away. Money you'll need sooner may not be a good fit.
How much do the guarantees matter to me?
Compare the guarantee levels at maturity and at death (75/75, 75/100 or 100/100), and whether resets are available.
Am I comfortable with the fees?
The guarantees and insurance features cost money. Segregated funds generally charge more than comparable mutual funds, and fees reduce returns.
Who should be my beneficiary?
Naming a beneficiary can mean the death benefit is paid directly to them. Who you name can also affect estate and creditor considerations.
Have I read the information folder and fund facts?
They explain the guarantees, fees and how withdrawals reduce your guarantees. Read them before you decide.
The bottom line
Segregated funds can make sense for people who value downside protection, estate-planning features, or potential creditor protection, and who are comfortable paying for them. They're not the right fit for everyone. Segregated funds can only be offered by licensed life insurance agents, and any recommendation should follow a review of your goals, time horizon and risk tolerance.
Sources:
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