Q&A: What do you get from a seg fund?
Qusetion: What is the advantage of Segregated Mutual Funds? – C.C.
Gordon Pape’s answer: Segregated funds (also called seg funds) are the insurance industry’s equivalent of mutual funds. There are three unique aspects to segregated funds. They are:
Guarantees: With an ordinary mutual fund, your investment is totally at risk. But with segregated funds, you have a degree of protection. Some insurance companies guarantee that, at maturity of the investment contract (normally 10 years) or at death, you or your estate will receive not less than 75 percent of the total amount you invested in the fund over the years. Other companies, looking for a competitive edge, offer a guarantee equal to 100 percent of your invested cash. That’s a no-loss guarantee, even if the stock market goes through the floor.
Creditor protection: If a close family member is named as beneficiary, segregated funds offer a degree of protection for your investments in the event you run into financial problems and have to declare bankruptcy. This protection is not absolute and may not apply in some cases, but recent court rulings have teed to uphold and strengthen it. If creditor protection is important to you, get legal advice.
Estate planning: Assets in a segregated fund pass directly to the beneficiary if you die. That means they avoid probate fees, which are on the rise in some provinces. Also, assets in segregated funds may receive favourable tax treatment if the investment is being made as part of a life insurance contract. In such a case, when you die, no capital gains tax is payable on the profits. Your beneficiary inherits the money tax-free, as part of the life insurance proceeds.
Those are the pluses. But you should also consider the disadvantages of segregated funds.
Lack of flexibility: Because these funds are usually used as methods of saving for an insurance or retirement annuity contract, this can sometimes mean a lack of flexibility or some kind of penalty if you want to cash out early. This isn’t always true, however so make appropriate inquiries.
Forced contributions: Some segregated funds can only be purchased through an investment contract with the insurance company that requires you put in a certain amount of money each month (“minimum premium” is the insurance terminology). A minimum monthly premium of $50 is typical, unless you’re prepared to invest at least $1,000 up front. In some cases, these premiums may be waived in the event you are disabled.
High commissions: Sales commissions for segregated funds can sometimes be high and, unlike commissions for ordinary funds, they are usually non-negotiable. Rates will vary from one company to another, so ask.
High management fees: Some segregated funds are assessed unconscionably high management fees, thus reducing investor returns. In some cases, these fees are totally out of line with the industry in general. But this criticism doesn’t apply to all insurance companies. Several have kept their fees at reasonable levels; you’ll have to search them out.
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