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WHAT ARE SEGREGATED FUNDS?
Pioneered by life insurers, segregated funds
(known as seg funds) are now being popularized by their new purveyors,
mutual fund companies.
The value of your
interest in a seg fund--the key word being interest--is equivalent to your
share of the securities owned by the insurer's seg fund. This gets credited
in terms of a number of units much like a mutual fund. The difference is
this: With seg fund policies, you own an interest in an investment portfolio
as stated in an insurance policy contract. You pay premiums that "deposit"
money into a seg fund policy that further invests in the seg fund. This is
not quite the same as when you "purchase" mutual fund units and indirectly
obtain "ownership" of securities held by a mutual fund. However, both mutual
funds and seg funds offer the potential to either gain or in some cases lose
capital.
Though the terminology
and differences between a mutual fund and a seg fund policy seem
superficial, there are five seg fund policy benefits worth noting:
- Guaranteed
Capital Advantage
After holding a seg fund policy
for ten years (some up to 15 years) or until death, a minimum of 75% (some
up to 100%) of your invested capital is guaranteed by a life insurance
company. Some companies permit the resetting of the guaranteed capital at
a higher value which also involves resetting the guarantee period. For
some investors, safeguarding capital from market losses is a major
benefit.
- Why
involve a life insurance company?
The insurer holds a reserve in relation to the guarantee provided in the
policy contract. Due to market fluctuations, it is especially important
that actuaries calculate and hold reserves needed to pay any future
liability due to a capital loss. Because of the need to assess and insure
the capital guarantee, the involvement of insurers is required. Mutual
fund companies now offering seg fund investments work in conjunction with
a life insurance company that facilitates this reserve and insures the
capital guarantee. The management fee charged to the segregated fund
includes the cost of that insurance.
- Creditor
Protection Advantage
Established under life insurance legislation, some seg fund policies might
be protected from creditors if one faces a lawsuit or bankruptcy during
the policyholder's lifetime. There must be a preferred beneficiary named
on the contract. After the policyholder's death, all beneficiaries are
protected against claims made by the policyholder's creditors.
- Estate
Planning Advantage
When a seg fund policyholder dies with a beneficiary designated on the
policy (outside the estate), the fund is exempt from probate and executor
fees. Your beneficiary receives the policy benefits quickly while the
estate remains responsible for any final taxes.
- Retirement
Planning Advantage
Some seg fund policies allow for additional insured security, promising
that a pre- established monthly payment of seg fund premiums will continue
on your behalf in the event of a disability. Consider how valuable this
pledge would be to your retirement if you could no longer work.
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