What Is a Segregated Fund?

A segregated fund is a type of investment vehicle commonly used by Canadian insurance companies to manage individual, variable annuity insurance products. A segregated fund offers investment capital appreciation and life insurance benefits.

Investors can expect to pay a slightly higher total expense ratio on segregated funds due to their more complex structure. Additionally, these fund offerings typically do not have aggressive fund objectives. Therefore, returns from the funds tend to be more modest.

Key Takeaways

  • A segregated fund is an investment pool structured as a deferred variable annuity and used by insurance companies to offer both capital appreciate and death benefits to policyholders.
  • Commonly found in Canada, segregated funds are private contracts between insurers and customers that must be held until contract maturity.
  • Because these products offer better guarantees than traditional insurance or annuity products, they do come with higher fees and expenses.

Understanding Segregated Funds

Segregated funds are structured as deferred variable annuity contracts with life insurance benefits. They are managed in separate accounts by the insurance company. These products are similar to other variable annuity products offered by insurance companies. They are primarily issued by Canadian insurance companies for Canadians. The products are not traded in the public market. They are structured as contracts and do not account for ownership by shares or units.

Segregated funds must be held until maturity. An investor can choose to invest in a segregated fund based on its investment objective and product terms. Segregated fund offerings vary broadly by objective and underlying investment options. They also offer investors varying terms for annuity payouts and the life insurance benefit.

How Segregated Funds Work

The funds offer capital appreciation through investment up to a specified maturity date. They also offer a life insurance death benefit if the owner dies before the contract matures. Most segregated funds offer a guaranteed payout of at least 75% to 100% of the premiums paid which is an advantage over standard mutual funds where the investor has the risk of losing all of their investment. This provision usually applies to both the death benefit and the annuity payouts.

Segregated funds begin payouts to investors following the specified maturity date. Investors can choose from various options for a payout schedule offered by the product once the segregated fund matures.

Segregated funds are considered to be insurance products sold by insurance companies and, as a result, the governing bodies and regulations responsible for overseeing segregated funds are usually the same ones that cover insurance companies.

Examples of Segregated Fund Investing

Sun Life and the Royal Bank of Canada are two companies with segregated fund product offerings for Canadians.

Sun Life

Sun Life offers a few different segregated fund options. Options from Sun Life include Sun GIF Solutions, Sun Lifetime Advantage GIF and Sun Protect GIF. Sun Life also offers segregated funds through financial advisors.

Royal Bank of Canada (RBC)

The Royal Bank of Canada offers a variety of segregated fund options for investors. Segregated fund options are available in three categories: Invest Series, Series 1 and Series 2. Allocations, underlying investments and terms vary by product offering.