Segregated Funds / Variable Annuities

By Ivon T Hughes
segregated fund chart

What is a segregated fund?

A segregated fund or variable annuity is an investment fund to which has been added an insurance policy contract. Segregated funds are offered by Canadian insurance companies as variable life insurance contracts that offer certain guarantees to the policy holder. Segregated funds' assets are kept separately from the insurance company's other assets.

Why buy a segfund or variable annuity?

Probably the main reason to buy a variable annuity or segregated fund is to increase your capital.

If you invest in a mutual fund you have no guarantee that you will get all, or indeed, any of the capital back.And we are speaking here of the RETURN ON capital, not the possible RETURN OF capital.

So, how can you protect your capital to make sure it doesn,t disappear? Well, that's where a variable annuity or segregated fund comes into consideration.

With a segregated fund, you can get guarantees of the return of your capital ranging from 75% to 100% after 10 or 15 years depending on the company issuing the segregated fund or variable annuity.

And you will also get similar guarantees on death. If you die at any time during the course of the particular contract,your heirs would receive at least the return of the amount invested less any withdrawals, adjusted to the guarantee you chose.And that applies,no matter whether the value your fund shares are up or down.

So these protections are similar to the protection you receive in a life annuity. With a life annuity, your income is guaranteed to remain the same for your lifetime and that of your partner, if any.It is this reassurance that people like and why they prefer products with guarantees of some sort.

And you have almost the same wide choice of segfunds that you have with mutual funds. The most popular choice of funds include dividend funds where the return is based on the performance of major companies. Or bond funds, which often include bonds issued by the federal and provincial governments as well as major corporations.

And if you are uncertain of what to do or are waiting on another event, there are daily interest funds or money market funds which should give you at least a small return.

Another feature of these segregated funds, which is too often ignored, is the right to reset the guarantee which locks in any increase in the market value of your investment. It can be compared to selling an individual stock at a profit but still holding the stock to make possible further gains.

While investing to increase your capital before you retire, this is one option you should explore. Segregated funds are widely available from many different insurance and investment companies and deserve your attention

What is the difference between a mutual and a segregated fund?

The funds are similar. The principal difference is that a segregated offers a guarantee upon death and often at fund maturity.

Death guarantee for a segregated fund

If you die before an agreed date and your fund value is less than the capital invested, a portion or all of the difference to your heirs will be refunded.

Maturity guarantee for a segregated fund

This guarantees that at maturity you will receive at least 75% of the capital invested.and some funds guarantee payment of 100% of the capital. To receive the guarantee you need to hold the investment for 10, 15 or 20 years.

Remember! These guarantees only apply at death or maturity

How do segregated funds work?

You invest in funds that are similar to mutual funds. Generally, there are various types of funds adapted to your ability to tolerate risk and to your financial goals (balanced funds, Canadian equity funds, etc.). Your investments will fluctuate based on the market value of the securities that make up the funds.

Are these risky investments?

These investments carry a risk depending on the type of fund chosen.

A 75% capital guarantee means you can still lose 25% of your capital.Segregated funds are also subject to annual fees that reduce returns.

Is the guarantee free?

No, compared with similar mutual fund investments, segregated funds can have higher fees due to the the cost of the death and maturity benefits.

What happens if the segregated fund is unable to honour the guarantee?

Assuris is an organization that protects the public against insurance company bankruptcies. If the financial institution is unable to honour the guarantee, Assuris may pay you the difference.

What are the steps to buying a segregated fund?

Make sure that the fund you choose meets what you are trying to achieve. This is probably the most important decision. Be careful!

Never buy a financial product with costs that you don’t understand.

How Often Should I Check The Value Of My Segregated Funds?

That is difficult to say.In reality you should be aware of what is happening in the real world of politics and finance.You cannot shut out the events around you.There is risk everywhere and you need to be as prudent in your investments as you are in your personal space.

If you find yourself uneasy with the investment you made, tell your broker to move your money, at least temporarily,into a Money Market fund or Daily Interest fund. You won't make money in these funds but your capital will be safe.

Some History of These Variable Annuities

Segregated funds were originally a pension plan product and in the late 20th century,insurance companies began to work with mutual fund companies to create a product that mirrored popular mutual funds.

The Investment Benefits of a Mutual Fund

Segregated funds are often described as guaranteed mutual funds.They work like mutual funds, but have investment guarantees which mutual funds do not have.The same characteristics of mutual funds are professional management,choice of investment portfolios and regular contacts.

Additional Segregated Benefits

Additional deposits result in a different maturity date for each deposit. In this example, if the fund had a 10-year maturity date, the guarantee would be honoured if the fund was held to 10 years from the date of the rese.


Investors can usually withdraw up to 10% of the assets in a segregated fund each year without any penalty. That figure rises to 20% in retirement accounts.There are penalties exist of deferred sales charges that often commence higher than regular mutual funds and decrease by set amounts each year until they reach 0%.

Protection From Creditors

The rights of life insurance beneficiaries trump those of creditors.which means that assets held in segregated funds are generally protected if the account holder files for bankruptcy,.provided assets weren't moved to evade creditors. This protects spouses, children, grandchildren and others should the account holder encounter financial difficulties. least two years.

Estate Planning

Assets held in segregated funds are not subject to probateso the capital and investment gains can go directly to the designated beneficiary. This speeds up the payment and minimizes legal costs.

Cost of Benefits

While segregated funds offer all these benefits, the cost of investing in segregated funds is higher than the cost of investing in similar mutual funds. While partial withdrawals are available, penalties for early redemption can make it difficult and expensive to access assets prior to maturity.If an investor wish to transfer to other funds there may be an additional fee. Some segregated funds restrict the number of transfers.

Segregated funds offer a unique way to invest in the financial markets. They can benefit from the upside potential, but protect the capital which leads to peace of mind provided by the insurance protection. Segregated funds issued by well known, insurance companies will minimize the risk.

Responsibilities of Life Insurers

All information pertaining to variable annuities is developed by life insurers.

They are also in charge of managing the investment and administration of all assets of the segregated funds. In addition, they set aside financial reserves used in settling the contractual guarantees covered by your contract, in accordance with the regulation.

Consumer Protection

All life insurance companies issuing segregated funds, are regulated by their territorial or provincial governments. The prudential oversight of life insurance companies is the role of the federal government, and these companies are inspected on regular basis.


Segregated funds may be the right option to investors who would like strong guarantees plus potential market returns.

Ivon T Hughes

About the Author

Ivon T. Hughes

Ivon T Hughes is a leading expert in life annuities in Canada. His website is a recognized authority on annuities. He's also an established insurance and investment broker, through The Hughes Trustco Group since 1972. Recently, he's been redefining how annuities are sold in Canada.


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