Structure
Many people describe a basic segregated fund as a mutual fund with certain guarantees. These guarantees are provided through the use of insurance. As with all insurance policies, there is a “premium” which represents the cost of the insurance. Therefore, all things being equal, a mutual fund will be cheaper than a segregated fund since you have the costs of the mutual fund plus the insurance premiums to pay for certain guarantees.
However, if you can reduce the cost of the underlying mutual fund by using an index fund, it is possible to have segregated funds, with all their principal and death benefit guarantees, with lower costs than mutual funds. This is where the Pro-Guaranteed Funds come in. They are segregated funds using the revolutionary FTSE RAFI methodology (The Fundamental Index) to provide lower cost investment portfolios with guarantees on principal and death benefits.
Maturity Guarantee
Investors in units of segregated funds have a guarantee upon maturity which means that if they hold the units for a certain amount of time, then they are guaranteed to receive the greater of the market value (if markets have done well, there is no need for the guarantee) or the guaranteed maturity value which is normally 75% of the contributions (less any withdrawals), but can be as high as 100% depending on the option you choose.
Death Guarantee
The Death Guarantee ensures that upon death, the investor’s beneficiaries receives the greater of the market value or the initial contribution (less any withdrawals). If an investors had contributed $100,000 to the segregated fund and the investment had fallen to $80,000, the investor’s beneficiaries would receive $100,000.
Possible Creditor Protection
In the event of bankruptcy, the assets inside a segregated fund may not be subject to the claims of creditors. The beneficiary names must be a direct family member, and it must be shown that the segregated fund was not purchased specifically to avoid claims of a creditor. Check with your accountant or lawyer for more information.
No Probate Fees
Upon death, the proceeds of the segregated fund can pass directly to your beneficiaries. They can bypass the probate process altogether, and therefore will not be subject to probate fees.
Flow Through of Capital Losses
Unlike mutual funds, which can only distribute realized capital gains, segregated funds can distribute realized capital gains AND realized capital losses. The investor can then carry back the capital losses up to three years or carry them forward indefinitely.