Skip to content

October 13, 2019

Segregated Funds for Estate Planning

As we age and our thoughts turn to estate planning, Segregated Funds may present a valuable planning opportunity.  As we progress through the stages of life our investment focus changes from growth to income to preservation.  Usually, the expected rates of return reduce as we age, primarily because we have less time to make up for a loss and feel the need to be more conservative in our approach.  Anyone who has retired shortly before or after a major market correction (or crash!) understands the impact volatility can have on their enjoyment of a comfortable retirement.

In addition, none of us want to leave an estate for our heirs which could be a fraction of what was intended or be a catalyst for family discord.   Fortunately, you do not have to forego the opportunity of growth in order to preserve the capital that you wish to leave to your family.  Segregated Funds not only protect your estate against market fluctuations, they also provide the comfort of knowing the inheritances you wish to leave will be received by those for whom they were intended.

What are Segregated Funds?

Segregated funds are similar to mutual funds and represent market- based, equity, bond or fixed income investments.  They differ from mutual funds in that as they are offered by life insurance companies, they have special benefits that mutual funds do not.  These special benefits include:

  • A guarantee of a minimum of 75% or 100% of your deposits upon the contract maturity or when you die. The minimum guarantee on maturity states that (for most companies) a minimum of 75% of your deposits are guaranteed at the 15th  A 100% maturity guarantee is also available for a higher cost.  For the purposes of this article we are focused on the death benefit guarantee;
  • Creditor protection which can protect your investment against an unexpected lawsuit or bankruptcy;
  • The ability to name a beneficiary whom receives your investment when you die. When this occurs the death benefit payout bypasses your estate and your investments will be paid to whom you intended with no probate nor administrative fees.  In addition, there would be no danger of any will variation action brought on by a disgruntled family member or heir.

Estate planning advantage of the death benefit guarantee

In addition to the above, the 100% death benefit guarantee allows someone in their 70’s or 80’s (or younger) to be slightly more aggressive in their investing without the danger of losing value for their estate.  Potential for growth remains without risk of dying when the markets are down.

The ability to name beneficiaries allows you to earmark specific funds to intended beneficiaries without the cost of a trust or probate fees.  This can be particularly advantageous in the circumstances of a blended family.  As previously mentioned, avoiding any wills variation action is also of comfort in knowing your estate will not be held up after your death while the courts dictate who is to receive some of the proceeds of your estate even if it is against your original intentions.

Many insurance companies offer segregated funds which are pools of investments managed by well-known, well-performing and reputable portfolio managers.  The fees charged for segregated funds are like those charged for mutual funds with a modest add on for the guarantees.  In many cases, depending on the insurance company, there is a reset of the death benefit to lock in gains.  For example, one major company has an automatic reset of the death benefit, which occurs every three years until age 80.  Once reset, the death benefit guarantee cannot decrease (unless withdrawals have been made), even if the market declines.  After age 80, the guarantee is the greater of the last reset or the market value of the funds.

If you are trying to determine the proper balance of performance and risk in your investments that you have earmarked for your heirs, Segregated Funds would be worthwhile investigating.  I would be delighted to assist you in determining if this approach is right for you and matching up with the insurance company which best meets your objectives.

Print Friendly, PDF & Email
Facebook Twitter Email Linkedin

Comments are closed.