An Alternative Investment for Capital Preservation & Estate Planning

Segregated Investment Funds are often misunderstood and underutilized by Financial Advisors and other Estate Planning professionals.

The investment funds offered through insurance carriers provide unique benefits guarantees. Segregated funds offer both death benefit and capital guarantees in various forms. Some plans offer 100% death benefit guarantees from day 1 as well as capital guarantees starting from 15 years.

In the modern world’s drive to get to the lowest cost many Financial Advisors don’t want to go towards segregated funds with their higher investment management fees. Depending on the guarantees, the additional MER fees for the funds can be anywhere between +0.25% and +0.85%. And in many cases there is no requirement to have these additional fees in an individual’s portfolio, but there are a number of areas where these plans work very well. Particularly for individuals as they approach retirement age as well as business owners and professionals.

These days it isn’t easy to obtain return or yield. The markets are more fully valued and fixed income is not a safe haven with the prospect of rising interest rates, individuals heading towards retirement want more than 2% on guaranteed investments but are fearful if they will have time to recover from a market crash while they are drawing income from their capital. With a segregated fund individuals could take more risk in some cases as they know that their capital would be guaranteed at retirement.

Segregated funds can be a great tool for the elderly affluent as well. Today most seniors will have discretionary money invested in the markets, but what happens if death occurs during a market crash like in 2008 where the market shrunk by approximately 40%. There are segregated funds available where as long as the contract is open before age 80 that 100% of all capital will be guaranteed; with this protection suddenly the additional segregated fund fee becomes inconsequential.

Other benefits of the segregated fund contracts are that the proceeds bypass the estate; this can become important in estate planning, especially in provinces outside of Quebec where probate fees equal a couple of percent of all assets.

Furthermore segregated funds are generally creditor proof, which is an important benefit for business owners or professionals (doctors, dentists, lawyers, etc.). Traditional investments can be seized by creditors in a litigation situation whereas segregated funds are generally creditor protected with a named beneficiary.
Segregated funds also offer settlement options; this can be important when leaving funds to children or other beneficiaries without the requirement of having a family trust set up, which can be costly for the initial set up plus yearly administrative fees.

To conclude, there are a number of pertinent points to consider in looking at the benefits of segregated funds. Again many financial advisors don’t look at these funds because of the additional management fees, as well as the perception of these investments as not being sophisticated and the complexity of understanding the various guarantees offered by the different carriers. However segregated funds offer a large universe of investments to choose from with many internal and external fund managers available. Therefore in any situation these funds will provide a good alternate investment in an individual’s asset mix.

If there are questions about segregated investment funds, feel free to contact our office for more information