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- Segregated funds are insurance-based investment contracts that offer market exposure with built-in guarantees
- They provide 75% or 100% capital protection at maturity or death, depending on the contract
- Some of the benefits of segregated funds include probate bypass, creditor protection, and reset options to lock in gains
- They are best suited for long-term investors focused on protection, estate planning, and risk management
When it comes to investment options in Canada, popular choices often include ETFs and mutual funds. However, there is another option too, segregated funds that combine dual benefits.
Segregated funds provide a mix of investment growth and protection, ensuring that you receive at least 75% of the invested amount at maturity or death. The guarantee options offered by most insurers in Canada include 75/75, 75/100, and 100/100.
We recommend segregated funds for those looking for long-term protection and want the benefits of estate planning, creditor protection, annual resets, and more.
Understanding segregated funds in Canada
Segregated funds, often called seg funds, are investment funds offered by insurance companies. When you invest in a segregated fund, you enter into a contract where your money is pooled with other investors and allocated across professionally managed portfolios, typically including equities, bonds, or other securities.
A key feature of segregated funds is the inclusion of guarantees. Most contracts provide a 75% or 100% guarantee of your original investment at maturity or death. This means that even if the chosen investment funds lose their value, the guarantee feature ensures you receive a minimum guaranteed portion of your investment.
The working mechanism behind segregated funds
Every segregated fund contract has two components: a market-linked investment and an insurance contract.
- Investment: When you invest, you purchase units within a segregated fund through an insurer, and your money is allocated to a professionally managed portfolio based on your chosen investment strategy. You can choose from different fund types based on your risk tolerance, time horizon, and financial goals. The value of your investment fluctuates with market performance, similar to mutual funds, allowing you to participate in potential market gains over time
- Insurance: The insurer guarantees 75% or 100% of your original investment at maturity or upon death. If markets decline, the insurer tops up your investment to the guaranteed amount. If markets perform well, you retain the full upside
What do guarantees mean in segregated funds?
In segregated funds, guarantees determine how much of your original investment is protected at maturity and upon death. Broadly, there are three guaranteed options that most insurance companies offer. Here’s a table illustrating the death and maturity benefits you will receive for the three options:
| Guarantee type | Maturity guarantee | Death benefit guarantee |
| 75/75 | 75% | 75% |
| 75/100 | 75% | 100% |
| 100/100 | 100% | 100% |
Let’s understand one of the guarantee types with an example:
If you invest $100,000 into a 75/100 segregated fund and the market value drops to $70,000 at the time of death, your beneficiary will still receive $100,000 because the contract provides a 100% death benefit guarantee.
However, if you invest in a 75/75 segregated fund under the same market conditions, your beneficiary would receive $75,000, since the death benefit guarantee covers only 75% of the original investment.
Benefits of segregated funds
Listed below are some of the reasons why you can choose segregated funds in Canada:
- Estate bypass: Segregated funds allow you to name a beneficiary directly within the contract. This helps avoid probate fees and ensures a seamless transfer of wealth to your beneficiaries
- Flexible investment options: These funds offer a wide range of investment choices, including equity, fixed income, and balanced portfolios. This flexibility allows you to align your investments with your risk tolerance and financial goals
- Professional management: Segregated funds are managed by experienced investment professionals who handle asset allocation, diversification, and ongoing portfolio monitoring. This makes them ideal for investors who prefer an expert-driven investment strategy
- Creditor protection: Segregated funds may offer protection against creditors when you name a spouse, children, or parents as the beneficiary. This can be particularly valuable for those who face higher liability risks, helping safeguard their personal investments from creditors
- Capital guarantee: Most investment contracts guarantee 75% or 100% of your original investment at maturity or upon death. This means that even if markets decline, you won’t lose your entire investment
- Reset feature: There is a reset option that allows you to lock in gains when the market performs well. If your investment value increases, you can reset the guaranteed amount to this higher value, effectively protecting your profits from future market downturns
Pros and cons of segregated funds
| Pros | Cons |
| Protects 75% to 100% of your original investment at maturity or death, despite the market fluctuations | Have higher management fees than mutual funds |
| Reset features allow investors to lock in market gains and increase the guaranteed value | Withdrawing money early may reduce or eliminate guaranteed benefits |
| Funds are managed by professionally trained managers | Because of guarantee structures, the structure may seem complex |
| Can bypass probate with named beneficiaries, helping them receive money faster | |
| Creditor protection is highly useful for business owners | |
| Supports estate planning goals |
What is the cost of segregated funds?
Segregated funds generally cost more than mutual funds because they combine both investment growth and protection. The main cost associated with segregated funds is the management expense ratio (MER), which includes:
- Investment management fees
- Insurance guarantee costs
- Administrative and operating expenses
In Canada, segregated fund MERs typically range between 0.5% and 1% higher than a mutual fund that is comparable. The extra cost is worthwhile for the built-in protection, probate bypass, creditor protection, and estate planning advantages. ETF has the lowest MER, typically around 0.05% – 0.75%.
Moreover, based on the guarantee level, the fees will vary.
| Guarantee option | Protection level | Fee impact |
| 75/75 | 75% maturity and death guarantee | Lower fees |
| 75/100 | 75% maturity guarantee and 100% death benefit guarantee | Moderate fees |
| 100/100 | 100% maturity and death guarantee | Highest fee |
Who should consider segregated funds?
Segregated funds can be highly effective for the following group of people:
- Pre-retirees and retirees: If you are approaching or in retirement, preserving your capital becomes important. Segregated funds offer downside protection through guarantees, helping ensure that market volatility does not significantly impact your retirement savings
- Investors focused on estate planning: If your goal is to transfer wealth efficiently, segregated funds can be a strong fit. The ability to bypass probate and directly pay beneficiaries ensures faster access to funds
- Low-risk appetite investors: If you are uncomfortable with market fluctuations but still want exposure to potential growth, segregated funds provide a balance. The capital guarantees act as a safety net, making them suitable for conservative investors who want reduced downside risk
- Business owners: Those exposed to financial risks may benefit from the potential creditor protection. This can help safeguard personal investments from business-related liabilities under certain conditions
Risks of segregated funds
A segregated fund comes with the benefits of creditor protection and estate planning, although it has some limitations, too. One of the biggest drawbacks is the higher management fees compared to mutual funds or ETFs. Although the fees are high, it is important to note that these additional fees pay for the insurance guarantees included in the contract.
There is another downside to segregated funds when you choose early withdrawals. Withdrawing funds early may reduce guarantees and market losses. This is the reason why segregated funds are recommended for those looking for long-term investments.
How are segregated funds different from mutual funds?
Listed below are the differences between segregated funds and mutual funds:
| Feature | Segregated funds | Mutual funds |
| Structure | An insurance contract issued by an insurer | Investment product offered by asset management companies |
| Capital guarantee | 75-100% at maturity or death | None |
| Death benefit | Pays the higher of market value or guaranteed amount | Not applicable |
| Estate planning | Bypasses probate with a named beneficiary | Typically goes through the estate |
| Creditor protection | Possible | Not available |
| Resets | Yes | Not available |
| Fees | Higher | Lower than seg funds |
Best segregated funds companies in Canada
Here is a list of companies offering segregated funds in Canada
| Company name | Seg fund options available |
| Sun Life |
|
| iA |
|
| Empire Life |
|
| RBC |
|
| Equitable Life |
|
Is a segregated fund worth it?
Segregated funds can be worth considering if you want to participate in both market growth and protection against uncertainties. They are particularly useful for investors focused on retirement planning or efficient wealth transfer.
However, these benefits come at a higher cost, so it is important to evaluate how segregated funds align with your financial goals, risk tolerance, and long-term strategy.
You can get in touch with our expert advisors at PolicyAdvisor, who will help you compare segregated fund contracts from multiple insurers in one place. If you are considering segregated funds, exploring our platform can help you determine whether they truly fit into your overall financial strategy and help you select the right one.
Frequently asked questions
Are segregated funds guaranteed in Canada?
Yes, segregated funds offer 75% or 100% capital guarantees at maturity or death. The guaranteed component ensures that in the event of death or maturity, even if the investment value is less, the insurance component will top it up.
What is the minimum holding period for segregated funds?
Most segregated funds have a maturity period of 10 years or more. To fully benefit from the guarantees, investors should stay invested for the entire term. Early withdrawals may reduce or eliminate these guarantees.
Are segregated funds better than mutual funds?
Both segregated funds and mutual funds serve different purposes. Seg funds are ideal for investors seeking capital protection, estate planning benefits, and creditor protection, while mutual funds are better suited for those focused on lower fees and higher growth potential.
Can I switch between segregated funds?
Yes, most segregated fund contracts allow you to switch between different funds within the same policy. However, frequent switching may impact guarantees or incur fees, depending on the contract terms.
Do segregated funds avoid probate in Canada?
Yes, if you name a beneficiary, segregated funds can bypass probate, allowing the proceeds to be paid directly to the beneficiary. This results in faster, private, and more efficient wealth transfer.
What does 75/75 mean in a segregated fund?
A 75/75 segregated fund means the contract provides a 75% guarantee on both the maturity value and the death benefit. This means that at the end of the maturity period, you are guaranteed to receive at least 75% of your original investment, even if the market value has declined. Similarly, if you pass away, your beneficiary will receive either the current market value of the investment or 75% of your original investment, whichever is higher.
Can I withdraw money from segregated funds?
Yes, you can withdraw money from segregated funds at any time. However, when you withdraw funds before the maturity date, you will receive the current market value of your investment, which may be higher or lower than your original amount. In some cases, there may also be withdrawal fees, depending on the contract. So, to access the guaranteed amount fully, however, you typically need to hold the investment until the maturity date or the death benefit applies.
Segregated funds in Canada combine market-linked investments with insurance guarantees, offering capital protection, estate benefits, and creditor protection. This guide explains how they work, their key benefits, and who should consider them as part of a financial strategy.
