Using segregated funds in a RRIF

They’re offered by life insurance companies, and are investment vehicles similar to mutual funds but with several interesting differences.Generally, segregated funds are on a par with mutual funds when it comes to investment returns, although fees are often higher for segregated funds.

The term “segregated” is used because laws governing life insurance require the companies to keep these funds separate from other assets and to hold them in trust for their owners, the unit holders. You can buy a RRIF based on various segregated funds, or you can add them to your mix within a self-directed RRIF — just as you can with mutual funds. Segregated funds are managed by professional money experts, in some instances the same people who manage major mutual funds.

The most attractive feature of these funds is that they can combine the growth aspects of a mutual fund with the principal guarantees of a GIC — guarantees that do not come normally with mutual funds nor with any other growth investments.

The guarantee is two-fold. First, segregated funds offer partial or full return of your investment, less any withdrawals, of course, at maturity (usually youinvestment must mature at least 10 years in the future) no matter how the markets perform during that time. In other words, if the market goes up, the gains are yours. If the market falls, you get back all the money you invested.

Second, these funds offer full return of your investment, less any withdrawals, at death, regardless of the maturity date. In this case, your heirs receive whichever is greater, the total amount you invested or the current value of your holdings.

Generally, investments in segregated funds do not have to be combined with any other life insurance policy or annuity. In some cases, however, there are potential tax savings if they are bought in tandem with certain life policies. Consult an independent expert before making any decision.

Segregated funds are offered in all the major fund categories: indexed, money market, bond, equity, balanced, and international. Some life insurance companies also offer the same range of purchase options and services on their segregated funds as are available with many mutual funds — a prime example being no-cost periodic withdrawal plans to provide investors with regular income. In addition, if you name a family member as your beneficiary, your investment in segregated funds will be protected from the claims of creditors.

One additional benefit, albeit a temporary one, is that, until January 1, 2002, segregated funds are exempt from the foreign-content limits that are imposed on other types of registered plans.

If you are interested in such funds, it is best to “shop the market” by dealing with an advisor or broker who acts as agent for at least several insurance companies — avoid those who represent only one. Most investment dealer representatives are now licensed to sell such insurance products as well.

Also, be aware that some companies are changing the guarantee policies on their funds because of recent changes in regulations. Be sure to get up-to-the-minute information.