One of the best kept secrets offered only in the insurance industry. Segregated (or seg) funds are an investment product sold by life insurance companies. They are individual insurance contracts that invest in one or more underlying assets, such as a mutual funds. They can also be used to protect your funds from taxation upon death and therefore can be used for estate planning.

Advantages and Disadvantages

Segregated Funds are advantageous because:

• Principal guaranteed – Depending on the contract, 75% to 100% of your principal investment is guaranteed if you hold your funds for a certain length of time (usually 10 years). If the fund value rises, some seg funds also let you “reset” the guaranteed amount to this higher value – but this will also reset the length of time that you must hold your funds (usually 10 years from date of reset).
• Guaranteed death benefit – Depending on the contract, your beneficiaries will receive 75% to 100% of your contributions tax free when you die. This amount is not subject to probate fees if your beneficiaries are named in the contract.
• Potential creditor protection – This is a key feature for business owners in particular

Segregated Funds have several drawbacks:

• Higher fees – Seg funds usually have higher management expense ratios (MER) than mutual funds. This is to cover the cost of the insurance features.
• Money is locked-in in order to obtain the guarantees – You have to keep your money in the fund until the maturity date (usually 10 years) to get the guarantee. If you cash out before that, you’ll get the current market value of your investment, which may be more or less than what you originally invested.