SEGREGATED MUTUAL FUNDS: Are They Too Good to be True?

Spring 1999 CSANews Issue 31  |  Posted date : Mar 01, 2007.Back to list

Would you like the benefit of the higher returns of American, Western European and Canadian blue chip equity mutual funds without a risk to your capital? Sounds too good to be true? Wrong! Today, nine Canadian mutual fund companies are offering funds called Segregated funds ­ that provide a guaranteed death benefit and capital guarantee after 10 years. These funds perform the same as the companies' regular funds, but come with an insurance company guarantee.

You will pay anywhere from 40 to 100 extra basis points per year in management fees for the guarantee, but there is no medical exam for the insurance guarantee, even for those 75 years of age or older.

Most plans will accept you to age 75 and provide a 100% guarantee of capital. Many plans will accept people over 75 with a 75% guarantee, which rises to 100% if you stay in for five years and stays in effect to age 100.

The segregated funds from such companies as Infinity, Trimark, C.I. and BPI are exempt from provincial probate fees if you designate a beneficiary and, based on the latest court decisions, they are also creditor-proof in the event of personal insolvency.

Make sure when buying these funds that you check out the funds' performance, the credit-worthiness of the insurance company behind them, how the risk is reinsured, and the fees charged for the benefits provided.

This is a key time for professional advice. Your advisor must be insurance licensed to offer these funds, and they are certainly not for children, registered educational savings plans, or for those under 50 years of age.

Assuming that you have 60% of your assets invested in equity-based funds, here is the progressive asset allocation into segregated funds as you get older.

Age vs % of equities in segregated funds:
55 (0-10%)
60 (10-20%)
65 (25%)
70 (50%)
75+ (75%)

This allocation is based on the costs, whether or not you are still working, and on the increasing need to reduce portfolio risk as you age.