A segregated fund is an annuity issued by an insurance company. They are similar to a mutual fund except for the fact that they come with capital or income guarantees as well as other substantial benefits. The term segregated means the issuing company must keep the premiums separated from other funds they are holding.
Like mutual funds "seg" funds have various fee options such as Deferred Service Charges (Back End fees that usually decrease over time), Low load and Front End Load fees. Typically the MERs (Management Expense Ratios) are slightly higher than the equivalent mutual fund to cover the companies risk in offering the guarantees. Some issuing companies also offer automatic re-balancing services.
Some of the key benefits of seg funds are as follows:
• Maturity benefit guarantees- At the maturity date of the contract a specified percentage of the premium is guaranteed to the account holder. Usually 75-100%. In other words if the market plummets just before your maturity date you will be guaranteed 75-100% of your premiums back even if the market value is zero. This essentially limits your risk to 25% of your capital where as in a mutual fund the risk is 100%.
• Death benefit guarantees- At the death of the account holder a specified percentage of the premium is guaranteed to the beneficiary regardless of the market value of the account, unless of course the market value is higher. This would be a great advantage if you are using a leveraged strategy especially if you chose the 100% death benefit option. Your entire loan would be covered regardless of the market value of the account at the time. A definite advantage from your beneficiaries point of view.
• You can name a beneficiary.
• Proceeds from a death claim are treated like an insurance policy. They by-pass the estate and go directly to the named beneficiary there by side stepping probate and estate fees. Since the proceeds go directly to the beneficiary you have the advantage of increased privacy and control over your estate.
• They have potential creditor protection.
• They now have an option of providing guaranteed income for life. This feature can provide an income bonus if you defer the start date of your retirement withdrawals. The withdrawal benefit can increase with age.
As with any portfolio you should diversify your assets through a range of investments and products. I believe the estate planning benefits of seg funds make them worthy of being an important part of your plan.
Like mutual funds "seg" funds have various fee options such as Deferred Service Charges (Back End fees that usually decrease over time), Low load and Front End Load fees. Typically the MERs (Management Expense Ratios) are slightly higher than the equivalent mutual fund to cover the companies risk in offering the guarantees. Some issuing companies also offer automatic re-balancing services.
Some of the key benefits of seg funds are as follows:
• Maturity benefit guarantees- At the maturity date of the contract a specified percentage of the premium is guaranteed to the account holder. Usually 75-100%. In other words if the market plummets just before your maturity date you will be guaranteed 75-100% of your premiums back even if the market value is zero. This essentially limits your risk to 25% of your capital where as in a mutual fund the risk is 100%.
• Death benefit guarantees- At the death of the account holder a specified percentage of the premium is guaranteed to the beneficiary regardless of the market value of the account, unless of course the market value is higher. This would be a great advantage if you are using a leveraged strategy especially if you chose the 100% death benefit option. Your entire loan would be covered regardless of the market value of the account at the time. A definite advantage from your beneficiaries point of view.
• You can name a beneficiary.
• Proceeds from a death claim are treated like an insurance policy. They by-pass the estate and go directly to the named beneficiary there by side stepping probate and estate fees. Since the proceeds go directly to the beneficiary you have the advantage of increased privacy and control over your estate.
• They have potential creditor protection.
• They now have an option of providing guaranteed income for life. This feature can provide an income bonus if you defer the start date of your retirement withdrawals. The withdrawal benefit can increase with age.
As with any portfolio you should diversify your assets through a range of investments and products. I believe the estate planning benefits of seg funds make them worthy of being an important part of your plan.
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