Segregated Funds 8 questions answered
Thinking about investing in a segregated fund? Here are the answers to 8 questions you might want to ask before investing.
- What is a segregated fund?
- How do segregated funds work?
- Who can sell segregated funds?
- Is this a risky investment?
- Is it a long- or short-term investment?
- Is the guarantee free of charge?
- What happens if the segregated fund is unable to honour the guarantee?
- What should I do before buying a segregated fund?
1. What is a segregated fund?
A segregated fund is an investment that’s similar to a mutual fund. The main difference is that it offers a guarantee upon death and sometimes at fund maturity.
Death guarantee
If you die before a pre-determined date and the value of your fund is less than the capital initially invested, this guarantee will reimburse a portion or all of the difference to your heirs, depending on the contract.
Maturity guarantee
This guarantee ensures that at the maturity date you will receive at least 75% of the capital you invested. Some funds guarantee payment at maturity of 100% or more of the capital invested. To receive the guaranteed amount, you must hold on to the investment for several years (10, 15 or 20 years, for example). You may have only a few days at the contract maturity date to take advantage of the guarantee. In general, you need to send a letter to your insurer.
2. How do segregated funds work?
You invest in funds that are similar to mutual funds. Generally, there are various types of funds adapted to your ability to tolerate risk and to your financial goals (balanced funds, Canadian equity funds, etc.). Your investments will fluctuate based on the market value of the securities that make up the funds.
3. Who can sell segregated funds?
Only life insurance representatives (financial security advisors) are authorized by the AMF to sell segregated funds.
4. Is this a risky investment?
Despite the guarantees offered, these investments carry a risk. The risk depends on the type of fund chosen (money market, bond, equity, etc.).
For example, if you have a 75% capital guarantee, you can still lose 25% of your capital at maturity. The loss may be more if you need to redeem your contract before its maturity date. If you need to redeem your fund to get cash, the guarantee won’t apply in most cases.
In addition, segregated funds are subject to annual fees that reduce returns.
5. Is it a long- or short-term investment?
In general, the investment can be redeemed at any time.
However, if you decide to redeem your fund before the maturity date, you may lose the guarantee. Additional fees may apply when you sell your investment.
Make sure that you won't need your funds before the maturity date!
Deferred sales charge (DSC)
Depending on which option you purchased your segregated fund contract under, redemptions may be subject to a DSC. The DSC is calculated as a percentage of the value of your units (or fund shares). The percentage decreases incrementally with each year you hold the units.
For contracts entered into on or after June 1, 2023, it is prohibited to charge a DSC when units are redeemed. Do you have a contract entered into before June 1, 2023 for which contributions are scheduled to be made? Contact your representative or insurer to find out if any options are available to you.
6. Is the guarantee free of charge
No, segregated fund guarantees are not free of charge. Compared with equivalent mutual fund investments, segregated funds usually have higher fees. This difference is due to the cost of the death and maturity benefits.
Here is an example of a segregated fund investment:
- Amount: $5,000
- Term: between 10 and 20 years
- Capital guarantee at maturity: 100%
- Average annual return before fees: 7%
- Segregated fund fees: 3.4% per year (compared with 2.4% for mutual fund fees)
- Annual return after fees: 3.6% (7% - 3.4%)
In this example, the annual fees (3.4%) are nearly half of the return (7%). You should take this into consideration before investing.
| 10-year maturity | 20-year maturity |
|---|---|---|
Value at maturity before deducting fees | $9,840 | $19,350 |
Basic fees for funds (2.4% per year) | $2,000 | $7,050 |
Value of fund at maturity (before deducting basic fees) | $7,840 | $12,300 |
Additional cost for segregated fund guarantees (1% per year) | $720 | $2,160 |
Value of segregated fund at maturity, after fees | $7,120 | $10,140 |
The amounts in the table are approximate and have been rounded up.
If your segregated funds lose value, the guarantee will apply at the maturity date. Here is an example of a $5,000 investment that has lost 15% of its value over 10 years.
Type of fund | Value at maturity |
|---|---|
Mutual fund, loss of 15% (no fees) | $4,250 |
Mutual fund, loss of 15% (after fees of $930) | $3,320 |
Segregated fund with 100% guarantee | $5,000 |
Good to know
To calculate the impact of fees on your investments in a segregated fund or in other investments, use the Évaluer le coût des frais sur vos placements calculator (in French only).
End of the insight7. What happens if the segregated fund is unable to honour the guarantee?
Assuris 
This link will open in a new window is an organization that protects the public against insurance company bankruptcies. If the financial institution is unable to honour the guarantee, Assuris may pay you the difference. Certain conditions must be met for coverage to apply. For more information, visit the Assuris site This link will open in a new window.
8. What should I do before buying a segregated fund?
Before buying a segregated fund, make sure that the fund you choose meets your investment objectives and risk tolerance. If it doesn’t, perhaps it’s not the right investment for you!
Get advice from your representative by asking the following questions:
- What guarantees apply to segregated funds?
- What fees are involved with segregated funds?
- Could the fees increase? If they do, what are my rights? (Don't forget that you must usually hold the investment at least 10 years to take advantage of certain guarantees.)
Be careful!
Never buy a financial product that you’re unfamiliar with or don’t understand.
End of the warning