Advantages of Investing in Segregated Funds

• Suitable to small and large amounts of capital
• Professional management
• Diversification
• Liquidity
• Transferability
• Preferred income
• Investor protection
• Different levels of risk/return to suit different goals

Segregated funds (often called seg funds) have been around for more than thirty years. Originally designed for pension plans to ensure professional fund management of employee assets, they have recently become a popular alternative to mutual funds. The assets of these funds must be kept and managed separate from the general assets of a life insurance company... thus the name.

When you purchase a segregated fund you entrust the insurer to pool your deposits with others investing in the same fund, and manage the daily operations of the fund. In return, the insurer collects a charge for investing and operating the fund similar to those collected by a mutual fund company.

Segregated funds are similar to mutual funds except the "manufacturer" is a life insurance company rather than a mutual fund company. As well, the funds are governed by the Life Insurance Companies Act and the newly created Individual Variable Insurance Contract guidelines set by the Canadian Life and Health Insurance Association. Mutual funds are governed by the Securities Act.

Segregated funds can hold a broad range of assets ranging from conservative money market holdings to aggressive emerging-market equities. They can be registered or non-registered, and can accept locked-in money.

Similar administration procedures apply such as minimum deposit limits, redemptions, dollar cost averaging, switching between funds, transfers, systematic withdrawal programs and quarterly statements. Segregated funds have professional fund managers. Your segregated fund portfolio must also comply with the RRSP 20 per cent foreign content rules.

You can find segregated fund unit values listed in the mutual fund sections of major newspapers.

The actual offer to sell mutual funds is made through a legal document called a prospectus. This document discloses all pertinent information about the funds. Segregated funds have a similar document called an Information Folder.

Because segregated funds are an insurance product they offer guarantees and many benefits not available to mutual fund investors.

Segregated funds have a maturity and death benefit that must be at least 75% of all deposits, less reductions for withdrawals or fees.

Income from segregated funds is allocated monthly not annually as is the case with many mutual funds. Therefore, you will only be taxed on gains realized by a fund while you are a unitholder.

Your financial advisor can help you set up your segregated funds so they are protected from your creditors. Also, a segregated fund can be set up so the death benefit can pass through your estate free of probate charges.

Your financial advisor must have a life insurance license to sell segregated funds. Your advisor will present segregated funds in the same manner as they do mutual funds by looking at your financial goals, your current financial position, your risk tolerance, creating an asset allocation for you, recommending investments, and providing periodic reviews. The special features of segregated funds broaden the solutions available to your advisor when they are preparing your investment plan.

Typically, an insurance product provides a benefit at the time of death or an endowment sometime in the future. Segregated funds provide both benefits, the death benefit and maturity benefit. These benefits have the same value but each is paid out under different circumstances. The value of these benefits is guaranteed to be at least 75 per cent of what you've put in, less reductions for withdrawals or fees. Some segregated funds have a 100 per cent principal guarantee, like those offered by Transamerica. The death benefit is paid when you die. The maturity benefit is paid on a date selected by you. This date must be at least 1 0 years after the date of your first deposit.

For example, you purchased a seg fund with a 100 per cent guarantee, and made only one deposit of $100,000. The market value of the contract was $110,000 at the time of your death. Therefore, the death benefit would be the greater of $ 100,000 and $110,000 or, $110,000. If on the maturity date, given the same deposit and a market value of $80,000, your maturity benefit would be the greater of $ 100,000 and $80,000 or, $100,000.

Mutual funds do not provide these benefits.

The Canadian Life and Health Insurance Compensation Corporation (CompCorp) is a federally incorporated, private company established in 1988 to administer the consumer protection plan. CompCorp's objective is to protect, within limits, Canadian policyholders against loss of benefits should a member of CompCorp become insolvent. Both the maturity and death benefits are covered, by this plan.

Mutual funds are not covered by a consumer protection organization.

The insurance death benefit is paid to a beneficiary selected by you or to your estate if there is no named beneficiary. But selecting a beneficiary has definite advantages. When there is a named beneficiary, the death benefit will pass through your estate free of probate charges (the charges applied to assets passing through your estate). When your beneficiary is a spouse, child or parent (or grandparent in Quebec) the death benefit is protected from your creditors. And while you're alive the policy assets are protected as well.

A wide range of segregated funds are now available to diversify your portfolio and meet your investment objectives. Segregated funds offer: product variety through equities, bonds, or money market instruments; specific geographic focus; investment objectives ranging from conservative to aggressive; and international exposure.

The growing popularity of segregated funds, with the safety of principal and excellent performance, is a reflection of the value investors place in these benefits. The variety and sophistication of segregated funds will continue to grow along with your needs