Investing in today’s environment 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 growth potential.

1.  100% Maturity and Death Benefit Guarantee

At a time when most companies are reducing their guarantees to 75%, a few companies still offer 100% guarantees for both maturity value and death benefit.

• 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 are 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 are taken.

2. 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).                                                                  

Case Study

How Significant are Reset Options?  You Decide. 

John invested $500,000 in a segregated fund and selected a technology fund as an investment choice.  The technology boom saw that investment grows to $850,000, and John wisely exercised his reset option.  Shortly afterwards, the dot.com bubble burst and the investment value fell from $850,000 to $300,000 with no significant recovery.  This same bubble burst devastated many investors. Meanwhile, John was able to recover not only his original investment but also the full $850,000 at his maturity date.

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3.  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.  

4.  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.

5.  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 applies to contracts purchased before age 80.  For contracts purchased after age 80, the guarantee is usually 75%.

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.

6.  Capital Protection

The market downturn is not the only risk to which capital can be exposed.  For many professionals and business owners, some situations 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.

7.  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.

8.  The Nortel Factor

For many who feel the Segregated Funds aren’t worth the higher MER fees, you may want to consider the Nortel Factor. Many financial opinions will argue that investing in Index Funds will negate the chance over time that a fund will ever be in deficit.  They should look no further than Nortel Networks as an example.  Nortel was once the darling stock of the Toronto Stock Exchange with huge daily volumes, a stock price that eclipsed $120/share and a market cap of almost $300 billion.  As a result, the TFX300 index stock was weighted so heavily with Nortel that it represented 30% of the value of the TFX.  When Nortel fell from grace, so did the TFX300 index fund.  As a result, many soon-to-be retirees were so heavily invested in Nortel, that their retirement fund became decimated within a matter of months.

Segregated Funds may not be for everyone, but for the squeamish investor,  for those wanting to take advantage of the more volatile equity markets but unable to deal with the potential downside, segregated funds may be the safety net you’re looking for for your retirement portfolio.

Please give me a call me to see why Segregated Funds will compliment your current investment strategy or use the share button to share this article with a friend or family member you think might benefit from this information.