Having Your Cake and Eating it Too: Seg Funds in an Uncertain Market

Investing in an uncertain stock market is not for the faint of heart. However, fortunately for Canadians, Segregated Fund products offered by many life insurance companies provide a safety net for nervous investors.

Fund products present some interesting opportunities for people looking to get more security in their investment portfolios without sacrificing their potential for growth.

100% Maturity and Death Benefit Guarantee

While many companies have reduced their guarantees to 75%, a few companies still offer 100% guarantees for both maturity value and death benefit. The 100% guarantee offers these advantages:

  • At the maturity date, the value of the investment will be the greater of the market value or 100% of the sum of deposits less any withdrawals taken. In other words, at maturity (minimum 15 years), your worst-case scenario is receiving full value for all of your deposits.

  • At death, the 100% guarantee will ensure that your beneficiary receives the greater of the market value of your Segregated Fund or the sum of all your deposits less any withdrawals taken.

Reset Feature for Maturity and Death Benefit Guarantee

Resets can have significant value in a volatile market. With this feature, you have the ability to:

  • Reset the maturity guarantee value (usually more than once per year). Accordingly, you can lock in your investment gains at maturity. With each reset, you also have the option of designating a new maturity date.

  • Automatically reset the death benefit guarantee, locking in your investment gains at death. (The frequency of the reset varies by company).

How Significant are Reset Options? You Decide.

  • In 2004, John invested $500,000 in a segregated fund and selected a first quartile but highly volatile equity fund as the investment choice.

  • Over the next few years, John’s fund performed very well and his investment grew to $750,000.

  • In late 2007, John exercised his reset option.

  • The market collapse of 2008 saw John’s investment value fall to $380,000.

  • This same collapse devastated many investors. Meanwhile, John was able to recover not only his original investment but also the full $750,000 at his maturity date.

As you can see, reset options give you the ability to lock-in gains. Implementing a reset when prices peak, the guaranteed amount of your seg fund will be increased.

Designation of Beneficiaries Enables Protection

One fact about Segregated Funds that is often overlooked is that as a product of a life insurance company, you can name a beneficiary for the proceeds at your death. This creates the potential that your segregated fund investment may be free from the claims of creditors or potential litigants.

Investing Using a Balanced Portfolio Close to Retirement

Volatile investment markets create a significant amount of stress and emotional turmoil, particularly amongst older investors. The closer you get to retirement, the higher the stakes. Therefore, many investors have forsaken the potential of higher returns for a significant portion of their portfolio. While this does reduce risk, it probably will result in lower returns.

By using Segregated Funds and taking advantage of the 100% Maturity Guarantee and reset options, one could achieve balance in their portfolio without necessarily locking in low yields.

Estate Conservation for Mature Investors

The 100% death benefit guarantee means that you can remain invested in an equity portfolio while not risking the estate value of your investment portfolio. Regardless of what happens in the market, your investment fund is totally guaranteed at your death. This guarantee is available for deposits made p until age 90.

By naming a beneficiary, upon your death, all of your segregated fund investments will flow to your beneficiary without any probate fees, administrative costs or risk of any Wills Variation Act litigation.

Capital Protection

Market downturn is not the only risk to which capital can be exposed. For many professionals and business owners, there are situations that may involve litigation either by creditors or other parties who feel they have a claim against your personal and business assets. By naming a preferred beneficiary, this risk is potentially eliminated.

Complicated Estate Protection

For domestic situations involving previous marriages and the desire to protect capital for present or previous family members, the beneficiary designation could be made irrevocable. The irrevocable beneficiary designation confers rights and protection on the beneficiary, which would not be as enjoyable through the “primary beneficiary” title.

Another advantage of Segregated Funds is that the use of named beneficiaries allows for a confidential transfer of wealth at death. In uncertain times having the comfort of a maturity and death benefit guarantee provides investors with a significant safety net.

Let’s connect to discuss if Segregated Funds will complement your current investment strategy. As always, please feel free to share this article with anyone you think would find it of interest.

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