Q: I recently attended a talk given by our financial adviser. The topic was segregated funds, which in Canada are like mutual funds but under the "umbrella" management of an insurance company. What appealed to me was the opportunity to reset the baseline returns once or twice a year, depending on the company. This would protect gains and guarantee a final payout of the higher amount - no matter what the market does. It sounded like the advantages of such a fund would outweigh the slightly lower returns. What can you tell me about segregated funds? Any pitfalls?
- J.H.,via e-mail
A: Segregated funds are annuities sold by life insurers. They look and act a lot like mutual funds, but typically have guaranteed values that, as you note, periodically readjust their value to take into account the performance of their underlying investment.
Anthony Windeyer, an insurance and estate-planning specialist in British Columbia, says that segregated funds are best suited to two types of people: those who want to invest in something that has a guaranteed growth component, and people facing heavy tax burdens on interest they are receiving from their investments.
Mr. Windeyer says that segregated funds are most useful for estate planning, especially for someone who wants to leave behind some money, since upon the client's death, his or her heirs receive 100 percent of the original investment, or the market value, whichever is higher.
He adds that when the value of the account resets, it restarts the maturity time frame. So If you withdraw any funds during the 10 years it might take for the annuity to mature, you will do so at market value and this will be deducted from that maturity amount.
Another consideration is the fee charged by the insurer for its guarantees. For the investor, says Windeyer, there is a price to pay for guarantees. But if the price you pay allows you to sleep at night, it may be worth it.