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Segregated Fund
What Is a Segregated Fund?
A segregated fund is an investment product used by Canadian insurance companies to manage variable annuity insurance products for individuals. These funds offer both investment capital appreciation and life insurance benefits. They tend to have a more complex structure compared to other investment vehicles, resulting in slightly higher total expense ratios for investors. Segregated funds typically have more modest fund objectives and, therefore, may not offer aggressive returns.
KEY TAKEAWAYS
A segregated fund is an investment pool structured as a deferred variable annuity and used by insurance companies to offer both capital appreciation and death benefits to
policyholders.
Commonly found in Canada, segregated funds are private contracts between insurers and customers that must be held until contract maturity
Because these products offer better guarantees than traditional insurance or annuity products, they do come with higher fees and expenses
Understanding Segregated Funds
Segregated funds are a type of investment vehicle that Canadian insurance companies use to manage individual, deferred variable annuity insurance products with life insurance benefits. These funds are structured as separate accounts that are managed by the insurance company and not traded on public markets. Unlike mutual funds, segregated funds are contracts that do not account for ownership by shares or units, and they must be held until maturity.
Investors can choose to invest in segregated funds based on their investment objectives and product terms. The offerings vary widely in terms of investment options, annuity payout terms, and life insurance benefits. These funds typically have a slightly higher total expense ratio due to their more complex structure and may not have aggressive fund objectives, resulting in more modest returns.
How Segregated Funds Work
Segregated funds are designed to offer capital appreciation through investments made up to a specified maturity date, while also providing a life insurance death benefit if the owner passes away before the contract matures. One of the key advantages of segregated funds is that most offerings provide a guaranteed payout of at least 75% to 100% of the premiums paid. This is in contrast to standard mutual funds where there is a risk of losing all of the investment. This provision generally applies to both the death benefit and annuity payouts.
Once the segregated fund matures, payouts to investors can begin based on various options for a payout schedule offered by the product. It’s important to note that segregated funds are not publicly traded and must be held until maturity. The underlying investment options and product terms of segregated funds can vary widely, allowing investors to choose a fund based on their specific investment objectives.
Important: Regulators that oversee segregated funds are typically the same ones responsible for regulating insurance companies, since segregated funds are considered insurance products sold by insurance companies. As a result, segregated funds are subject to regulations that are specific to the insurance industry. These regulations may include rules around disclosures, marketing, sales practices, and financial reporting. It’s important for investors to understand the regulatory environment around segregated funds and to carefully review the terms and conditions of any investment product they’re considering.
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