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Segregated funds: a fantastic, yet lesser-known investment vehicle

Protected Investments, Guaranteed Protection, Death Benefit, Creditor Protected

Have you heard of something called “Segregated funds”? Chances are, like most people, you haven’t. It’s quite unfortunate because, besides the many other well-known investment vehicles such as mutual funds, bonds, stocks, and others, segregated funds offer a lot of unique benefits that can help diversify your portfolio. Today, you’ll be learning about segregated funds, or “seg funds” for short.

Seg funds are a special type of investment vehicle specific to Canada. They are under the administration of various life insurance companies, and the easiest way to describe them would be a mutual fund with protection features. The name “segregated fund” comes from the fact that they must be held separately from the company’s other investments. You are probably familiar with mutual funds, as they are simply a bundle of stocks. Segregated funds take an existing mutual fund and create a protection wrapper around it, giving the investor several benefits regarding protecting their wealth. Let’s take a look at some of the benefits that are available:

  1. Maturity guarantee. The maturity guarantee says that upon the maturity date, which can be 10 years, 15 years, or age 100, depending on the company chosen, you’ll receive back 75% or 100% of the principle amount invested. Essentially ensuring that over a longer period, your investment value will stay above a certain amount.

  2. Death benefit guarantee. With this feature, if the person holding the investment were to pass away, 100% of the principle investment would be paid out to the beneficiary. Note that this feature is particularly useful for older investors who are thinking about estate planning, especially when combined with the next benefit.

  3. Probate bypass. Normally, upon death, a person’s estate will have to go through probate and be charged a percentage fee by the government, in addition to lawyer and accountant fees. With a segregated fund, the estate will not only be able to save on the fees, but also save on their time!

  4. Creditor protection. Upon passing, segregated funds are creditor protected because legally speaking, once the investor passes away the money now belongs to the named beneficiary of the policy.

In addition to these benefits, there is some other information that would be useful to know. For one, only advisors who are life licensed in Canada are allowed to offer seg funds. So if you want to learn more about segregated funds, a life licensed financial advisor would be a good person to talk to. Additionally, you might ask what sort of investments make up a seg fund? Just like a mutual fund, a seg fund can be extremely varied. You can find seg funds that are composed almost entirely have cash and bonds, and you can also find seg funds that are entirely aggressive, small-capital investments. The choices are endless.

With segregated funds, add another investment vehicle to your repertoire, and help yourself on the way to building a fully diversified investment portfolio!

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