A segregated fund offers a guarantee upon death and a valuable estate planning tool. Segregated funds are similar to mutual funds in a few ways, still segregated funds have the ascendancy in this investment industry. The main difference is that it’s worth the current market value and potential protection from creditors. Segregated funds have something to offer to all as follows:
Both mutual and segregated funds contain a diversified group of investments such as stocks, bonds and money market investments. Segregated Funds are considered being a life insurance products and regulated by Provincial Life Insurance Acts, where mutual funds by Securities Legislation. Segregated funds have guaranteed Maturity and Death Benefit, between 75% and 100% of premiums paid. Segregated fund policies have a “lock-in” feature and withdrawals during the period will be deducted from the principal. Another fundamental difference between segregated funds and mutual funds is that segregated funds have the ability to reset the maturity and death benefit guarantee at a higher market value of the investment. This protection against investment losses is sometimes automatic and some offer periodic resets (monthly, yearly or tri-annual basis). Segregated funds are more secure plans, can partially or fully redeem the fund at any time. The maturity guarantee can be range from 10 years to 15 years or more.
Death Benefit and Taxation
With segregated funds, the beneficiary can be protected from creditors and probate fees. Mutual Funds would go through probate and the government would take a percentage of the value, wherein the Segregated Fund beneficiary would have the guaranteed death benefit or the market value depending on which is greater. When the guarantee of the policy is more than the market value of the policy, the beneficiary will get a top-up which is similar to a capital gain. The income from segregated funds is tax-advantaged since the income allocations are taxed when the investment income is paid to the policyholder. With segregated funds the flow of investment income is direct and in mutual funds, capital losses do not flow directly.
Creditor and liability protection
Whether it’s registered or non-registered assets, it protects them from creditors within a segregated fund policy. In segregated funds, the beneficiary might be a spouse, child, parent, grandchild and there is creditor protection available to you with bankruptcy. In addition, with the liability protection in segregated funds policies, the assets may be protected if a lawsuit is filed against you.
Probate protection and Guaranteed income
Because segregated funds are an insurance contract, they do not have to go through your estate and attract an estate or probate fees. At death, the proceeds very quickly to a named beneficiary, avoiding the estate administration process, and probate fees. The guaranteed monthly income, with fully invested in the markets and have continued market growth. Segregated funds provide a greater inheritance and create a guaranteed lifetime income.