SILVER: Segregated funds blend growth, guarantees, and privacy

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If you have more money than you need in your lifetime, then segregated funds may be a great solution to pass on more wealth to your estate.

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Segregated funds, investment products offered exclusively by insurance companies, have gained popularity — particularly among retirees and individuals prioritizing estate planning. Similar to mutual funds, segregated funds combine investment potential with unique insurance features, notably a guaranteed death benefit, providing investors both growth opportunities and financial security.

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A primary advantage of segregated funds is the guaranteed death benefit, often covering up to 100% of the initial investment. This guarantee ensures that an investor’s original capital remains protected, regardless of market fluctuations. For retirees who have surplus funds intended for their heirs, segregated funds enable them to comfortably invest in higher-risk, higher-return assets — confident in the assurance that their principal will remain intact. This strategic investment approach can significantly enhance the value of their estate, maximizing inheritance for beneficiaries.

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Many segregated fund contracts also include an annual reset feature, generally available up until age 80. This option allows investors to lock in market gains annually, shielding these gains from subsequent market downturns. Over time, this ensures that beneficiaries inherit the highest achievable value — effectively serving as a market-based lifetime guarantee.

Segregated funds offer another valuable benefit: The ability to designate beneficiaries directly, even within non-registered accounts. Unlike standard investment accounts, segregated funds bypass probate — a process that can be lengthy, expensive, and publicly accessible. This means assets transfer efficiently and privately to beneficiaries, preserving both time and confidentiality.

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Furthermore, segregated funds provide creditor protection — a particularly attractive feature for business owners and professionals who might face litigation or creditor claims. Typical non-registered investment accounts lack such protection, leaving assets potentially vulnerable.

Despite these considerable advantages, segregated funds come with certain drawbacks. Their primary disadvantage is higher cost; these products usually have elevated management fees and additional insurance charges compared to traditional mutual funds. Over time, these increased costs can diminish overall investment returns, impacting long-term performance.

Accessibility also poses a challenge. Unlike mutual funds, which investors can easily purchase through banks, brokers, or independent financial advisors, segregated funds require transactions through advisors who hold specific insurance licences — potentially limiting their availability and convenience.

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The structure of segregated funds, blending investment with insurance elements, may also be complex and difficult for some investors to fully comprehend. Without clear guidance from a knowledgeable advisor, this complexity could result in misunderstandings or investments that don’t align well with individual financial goals.

In summary, segregated funds can be a highly beneficial financial solution, particularly suitable for retirees and individuals focused on maximizing the value of their estate and ensuring secure wealth transfer. For those comfortable with higher costs and somewhat restricted accessibility, segregated funds provide a powerful combination of investment growth, risk management, privacy, and estate planning benefits.

If segregated funds align with your financial goals, it is important to consult with an advisor who is knowledgeable about insurance products to fully explore this option.

— Michael Silver, B.Comm. (Hons), CFP, CHS, Managing Partner — W.P.G. The Wealth Planning Group, and a guest writer for the Winnipeg Sun.

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