|Segregated funds investment|
A Segregated fund is a type of unique investment product in the Canada financial market, administered by Canadian insurance companies.
1. What is segregated fund?
Segregated fund is a type of unique investment product in the Canada financial market, which is an attractive option for Canadian residents. Non-residents cannot invest in segregated fund. Segregated fund and mutual funds have some of the same characteristics, including:
- Like mutual funds, segregated funds consist of a pool of investments in securities such as bonds, debentures, and stocks. Though buying securities, investors can benefit from the units they are holding.
- The value of the segregated fund fluctuates according to the market value of the underlying securities
- Segregated fund investors can buy or sell segregated funds via licensed insurance representatives at any time. If investors want to sell the fund before the maturity date, they will receive the investment's current market value.
According to these similarities, segregated funds are often referred to as "mutual funds with an insurance policy wrapper".
2. The differences between segregated and mutual funds
3. The advantages of segregated fund
- Segregated funds are sold as deferred variable annuity contracts and can be sold only by licensed insurance representatives.
- Segregated funds are owned by the life insurance company, not the individual investors, and must be kept separate or "segregated’) from the other assets of the company.
- A segregated fund investor is not referred to as a unit holder; instead, the investor is the holder of a segregated fund contract. The contract involves the contract holder, annuitant and beneficiary (Contract holder can name a beneficiary to receive any proceeds upon contract holder's death; the proceeds are paid directly to the beneficiary). If the segregated fund contract is not registered (held inside an RRSP), the contract holder and annuitant can be different; while, if the segregated fund contract is registered, the contract holder and annuitant must be the same.
- All segregated fund contracts have holding periods to reach maturity date, usually 10 years. When reaching the maturity date, beneficiary can receive principle and gains.
Compared to mutual fund, segregated fund has the below advantages:
- Segregated fund can insure investor's principal. Insurance companies are regulated by provincial supervision departments in Canada that they should insure at least 75% of principal when the fund is matured, and 100% most time. Because of this, normally we assume “segregated fund” as “principal-secured fund” rather than literally as “isolated fund”. As there is no security for mutual fund's principal, people might lose money when investing in mutual fund.
- Segregated fund share the same features as insurance. Other than the principal being secured, segregated fund also has death benefits for clients. Basic death benefits are assumed to be the difference between net asset value and initial investment of the segregated fund. For example, a client purchases a segregated fund valued $100,000 and matured in 10 years. 5 years later, the client dies accidentally and the market value of the fund at that time is $80,000. Under this circumstance, the beneficiary of the client can obtain $20,000 death benefit.
- Segregated fund can protect investors from creditors. Segregated fund is an investment contract in nature, which is owned by insurance companies rather than investors (contract holders). This kind of investment structure effectively protects investors (contract holders) from creditors if the investors own debts. For example, a self-employed professional person owns a non-registered investment account valued $300,000 and a commercial debt valued $150,000 when he dies. If the money in the non-registered investment account is invested in mutual fund, the creditors can claim for half of the money and only $150,000 is left to his family. On the contrary, if the money is invested in segregated fund, the beneficiary of the investment contract can obtain all the $300,000.
- Segregated fund benefits heritage transfer. As segregated fund is essentially a special insurance contract, the fund can be transferred to the appointed beneficiary quickly and conveniently when matured without any time-consuming and expensive heritage inspection.
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