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Segregated funds & annuities
These are insurance contracts, not securities. That distinction is not a technicality — it is the entire reason they behave differently at death, in a creditor claim, and on a probate application. It is also why they cost more.
What a segregated fund actually is
An individual variable insurance contract issued by a life insurance company, where the value tracks an underlying pool of investments. As an insurance contract it may include maturity and death-benefit guarantees, beneficiary designations and possible creditor protection that differ from conventional mutual funds. Its management expense ratio is generally higher to pay for those features.
Guarantees
A maturity guarantee and a death benefit guarantee, typically between 75% and 100% of deposits depending on the contract. If the market is down when you die or when the contract matures, the guarantee may set a floor. Withdrawals reduce guarantees, and maturity dates, age limits, resets and other contract terms apply. The higher the guarantee, the higher the fee generally is.
May pass outside the estate
When an eligible beneficiary is validly designated, proceeds may be paid directly and outside the estate, subject to the contract and applicable law. That can avoid Estate Administration Tax on the contract value and reduce reliance on a Certificate of Appointment.
Possible creditor protection
Where the beneficiary is a spouse, child, grandchild or parent, or is irrevocably named, the contract may sit outside the reach of creditors. This is fact-specific, it does not survive a transfer made to defeat existing creditors, and whether it applies to you is a question for a lawyer.
The honest trade-off
Contract guarantees and beneficiary-designation features may be valuable for the right person, but they are conditional and come at a cost. A segregated fund may carry a higher MER than a comparable investment fund, and the difference compounds over time. Compare total costs, contract terms, investment choices and alternatives before deciding whether the insurance features justify the price.
Roughly speaking, these tend to earn their fee for people who are older, who have a genuine creditor exposure such as a professional practice or an active business, whose estate would otherwise face a large Estate Administration Tax bill, or who will actually stay invested through a downturn because the floor lets them. They tend not to earn it for a young accumulator with a long horizon, no creditor exposure and a modest estate. We will tell you which one you look like.
Annuities
An annuity converts a lump sum into a contractual income stream — for a set number of years or for life, depending on the option selected. It can reduce longevity risk and the need to make ongoing investment decisions. What you give up may include access to the capital and upside beyond the contracted payments.
Payout rates depend heavily on interest rates at the moment you buy, which makes timing matter more than people expect. A prescribed annuity bought with non-registered money is taxed more favourably than the same income from interest, because each payment is treated as part return of your own capital — confirm the treatment in your own case with your accountant.
Is my money protected if the insurance company fails?
Segregated fund contracts and annuities issued by member companies carry protection through Assuris, the industry compensation body, within published limits. It is not the same scheme as CDIC deposit insurance and the limits work differently. Ask us for the current limits for the specific contract before you commit.
Can I hold these in an RRSP, RRIF or TFSA?
Yes, segregated fund contracts can generally be held in registered plans as well as non-registered accounts. A registered plan may already permit a beneficiary or successor-holder designation, so the additional estate-planning value of the insurance contract depends on the account, designation, contract and applicable law.
What is a reset?
Some contracts let you lock in a higher market value as the new guaranteed base, resetting the guarantee upward and usually restarting the maturity clock. It is a useful feature after a strong run. Read what it does to the maturity date before using it.
Every life insurance agent in Ontario is licensed by FSRA, and the register is public. Look up licence #23219192 on FSRA Licensing Link. Do this for us and for anyone else you speak to.
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