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December 20, 2014

Segregated Funds: Investing With A Safety Net

Investing today is not for the faint of heart.  Fortunately for Canadians, segregated fund products offered by many life insurance companies provide a safety net for nervous investors.

Segregated Fund products present some interesting opportunities for people looking to get more security in their investment portfolios without sacrificing their potential for growth.

100% Maturity and Death Benefit Guarantee

At a time when most companies are reducing their guarantees to 75%, companies like Standard Life are offering 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 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 provides that your beneficiary will receive the greater of the market value of your segregated fund or the sum of all your deposits less any withdrawals taken.

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 twice 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.
  • The death benefit guarantee values are automatically reset every three years thereby locking in your investment gains at death.

 How Significant are Reset Options?  You Decide.

John invested $500,000 in a segregated fund and selected a technology fund as the investment choice. The technology boom saw that investment soon grow to $850,000 and the client wisely exercised his reset option. Shortly afterward, the dot.com bubble burst and the investment value fell from $850,000 to $300,000 never to recover beyond that. This same bubble burst devastated many investors while John was able to recover not only his original investment but the full $850,000 at his maturity date.

 

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.  

No Charge Withdrawals

Almost all segregated fund products allow for an annual withdrawal of up to 10% of the total value in your fund during deferred sales charge period.

Investing Using a Balanced Portfolio Close to Retirement

Volatile investment markets create a significant amount of stress and emotional turmoil especially amongst older investors.    The stakes go up the closer you get to retirement so many investors have forsaken the potential of higher returns for a significant portion of their portfolio.   While this does reduce risk, it definitely guarantees lower returns.

For example, Government of Canada bond yields as December 3, 2014 were 1.45% for a five year bond and 1.95% for ten years.  At the same time, the long term real return bond yield was 0.65%.  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. 

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 is applicable to contracts purchased before age 80.  For contracts purchased after age 80 the guarantee is 75%.

An important feature of Standard Life’s product is that the guarantee is based on the contract’s initial deposit date.  This means that if you were 79 and deposited only $1,000 into a non-registered account, all future deposits, would be 100% guaranteed at death. 

By naming a beneficiary, upon your death all your segregated fund investments will flow to your beneficiary without any probate fees or administrative costs.

Capital Protection

Market downturn is not the only risk to which capital can be exposed.  For many professionals or business people there are situations which may involve litigation either by creditors or other parties who feel they have a claim against your personal and business assets.  By appointing a preferred beneficiary, this risk is potentially eliminated.

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 irrevocably.  The irrevocable beneficiary designation confers rights and protection on the beneficiary they would have not enjoyed by being named simply as a primary beneficiary.

Another advantage of Segregated Funds is that the use of named beneficiaries allow 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.

Call me to see if Segregated Funds will compliment your current investment strategy or use the social sharing buttons below to share this article with a friend or family member you think might benefit from this information.

 

©iStockphoto.com/James Steidl

 

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