With today’s market volatility, investors should consider the benefits that segregated fund policies offer them, as well as the unique features that make them different from mutual funds, especially with creditor protection, and payouts that bypass probate.
A segregated fund contract has two parts: an investment that produces the return and an insurance policy that covers the risk. Like a mutual fund, your money is pooled with other investors to share investment gains. But because they are issued by life insurance companies, there are guarantees that protect the principal from sudden market declines. They are like a mutual fund with a safety net.
Guaranteed income for life: With certain segregated fund contracts that are designed for retirement income, your income won’t decrease regardless of how the fund performs unless you take out excess withdrawals. This helps protect you from the risk of outliving your money, market volatility and inflation.
Maturity guarantees: Depending on the product, segregated funds guarantee usually 75% or 100% of the premiums paid (net of any redemptions), allowing more effective planning for specific life events such as retirement.
Death benefit guarantees: Segregated funds guarantee your principal in the event of death. Depending on the product, this is usually 75% or 100% of the premiums paid (or policy value if you’ve locked in market gains with policy resets) net of any redemptions.
Speedy estate settlement: Segregated funds are insurance contracts, and as such, a beneficiary can be named to receive any proceeds on the death of the life insured. This means that the proceeds do not flow through the estate but are paid directly to the beneficiary without delay. It also avoids probate taxes and other fees associated with the settling of an estate such as legal and accounting fees.
Potential for protection from creditors: When the named beneficiary is a member of the family class (spouse, parent, child or grandchild) segregated funds can provide protection in the event of bankruptcy or other action by creditors. This may depend on individual court decisions, which can be subject to change and can vary for each province.
Named beneficiaries: You can choose one or more beneficiaries. These designations can be your estate, your children or other individuals, or associations such as charities.
Flow through of capital losses: Mutual funds don’t flow through capital losses. Segregated fund capital losses are subtracted from the capital gains within the fund and only the net capital gains will be shown on the T3. In a year where losses are greater than gains, the excess losses are carried forward to offset gains in a future year. The advantage to the investor is that capital losses not used in the current year can be carried back three years or carried forward to future years. In other words, the fund doesn’t choose when to claim capital losses, the investor does.
All taxable events are reported: With a mutual fund, only the distributions relating to fund activity are reflected on the investor’s T3. If an investor redeems any of their units, they must calculate the gain and loss and report these on their tax return. Another advantage related to segregated funds is that the insurer tracks the cost base for each investor and all taxable events are reflected on a T3 so there is no additional accounting required by the investor.
As with all things financial, seek out a trusted advisor and find out if investing in segregated funds makes sense for your age, risk tolerance and investment timeline.
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