Browse Analysis of Managed and Structured Products

22.2.3 Segregated Fund Features

A comprehensive guide on the unique features of segregated funds, including maturity guarantees, death benefits, and creditor protection, among others.

22.2.3 Segregated Fund Features

SEGREGATED FUND FEATURES

Segregated funds offer investors a variety of unique features, including maturity guarantees, death benefits, and creditor protection.

MATURITY GUARANTEES

Maturity guarantees are a fundamental contractual right associated with segregated funds, providing assurance that the contract holder or the beneficiary will receive at least a partial guarantee of the money invested. Provincial legislation requires the maturity guarantee to be at least 75% of the amount invested over a contract term of a minimum of 10 years or upon the death of the annuitant.

To provide greater capital protection, some insurers also offer a 100% guarantee, often linked to longer terms, such as 15 years. These options come with a higher management expense ratio (MER) due to the increased risks associated with offering full maturity protection after 10 years. Flexible guarantee options may also be provided by insurers, varying from combinations like 75% maturity guarantee and 75% death benefit to 100% maturity guarantee and 100% death benefit.

AGE RESTRICTIONS

Insurance companies providing maturity guarantees exceeding the statutory 75% often impose age restrictions. For example, the individual on whose life the death benefits are based must typically be younger than 80 years when the policy is issued. Alternatively, the contract holder might receive reduced protection as the annuitant ages.

RESET DATES

Reset dates provide flexibility to renew segregated fund contracts upon expiry of the initial 10-year term, depending on the annuitant’s age. A contract reset locks in the current market value and establishes a new maturity date. Resets can be frequent, ranging from daily to annually, with daily resets offering particular advantages in both rising and falling markets.

DEATH BENEFITS

Death benefits ensure that the contract holder’s beneficiary or estate receives a guaranteed amount in the event of death. The benefit is calculated as the difference between the guaranteed amount and the net asset value of the fund at the time of death.

Example

Keith purchases a segregated fund contract for $100,000 and names his wife, Patricia, as the beneficiary. With a 75% guarantee at death, the guaranteed amount is $75,000. Upon Keith’s death in the fifth year, the market value of the fund is $80,000, which Patricia receives because it exceeds the guaranteed amount.

Conversely, Ayida with the same purchase and contract terms names her son, Antoine, as the beneficiary. She dies in the fifth year with the market value of the fund at $65,000. Antoine then receives the guaranteed amount of $75,000, comprised of the $65,000 market value and an additional $10,000 as death benefit.

Table 22.1 | Death Benefits Total Amount Paid

Guaranteed Amount	Market Value at Death	Death Benefit	to Beneficiary
$10,000	$8,000	$2,000	$10,000
$10,000	$9,000	$1,000	$10,000
$10,000	$10,000	None	$10,000
$10,000	$11,000	None	$11,000

CREDITOR PROTECTION

Segregated funds provide unique protection from creditors as exacted through their ownership by insurance companies, making them excludeable under bankruptcy legislation.Creditor protection is advantageous for clients vulnerable to debt recovery actions, including business owners and entrepreneurs. However, this protection is conditional. For it to apply, the purchase must be made in good faith and the contract should specify a named beneficiary.

BYPASSING PROBATE

Segregated fund contracts allow the estate to avoid probate, transferring proceeds directly to beneficiaries. This bypass reduces potential delays and fees associated with the settlement of the estate.

COST OF THE GUARANTEES

The costs associated with segregated funds include typical mutual fund expenses and additional costs for death benefits and maturity guarantees. Assessing the complete value of these insurance features can be challenging. Generally, segregated funds entail higher management expense ratios than comparable mutual funds.

BANKRUPTCY AND FAMILY LAW

Federal bankruptcy law usually excludes segregated funds from property divided among creditors. However, under certain conditions outlined in the Bankruptcy and Insolvency Act, proceeds may be subject to seizure, e.g., if the purchase occurred one year before bankruptcy or while the contract holder was legally insolvent within five years of the purchase.

GLOSSARY

  • Segregated Fund: A type of investment fund legally wrapped in an insurance contract and providing unique benefits compared to mutual funds.
  • Maturity Guarantee: The protection that an investment will retain a certain minimum value upon financial maturity or a set holding period.
  • Death Benefit: A payout to beneficiaries upon the policyholder’s death, ensuring the investment reaches a guaranteed minimum value.
  • Creditor Protection: Safeguards preventing court-ordered asset seizure within bankruptcy proceedings due to the segregated ownership by the serving insurance company.

KEY TAKEAWAYS

  • Segregated funds come with unique features such as maturity guarantees, death benefits, and creditor protection.
  • Maturity guarantees offer reassurance of retaining a significant portion of the invested amount over a designated period.
  • Death benefits provide comfortable financial assurances for beneficiaries.
  • Creditor protection makes segregated funds a safer investment choice for debt-vulnerable individuals.
  • Segregated funds are beneficial for estate planning by bypassing probate

📚✨ CSC Exam Bank ✨📚

Welcome to the Knowledge Checkpoint! You'll find 10 carefully curated CSC exam practice questions designed to reinforce the key concepts covered. These questions will help you gauge your grasp of the material, identify areas that need further review, and ensure you're on the right track towards mastering the content for the Canadian Securities certification exams. Take your time, think critically, and use these quizzes as a tool to enhance your learning journey. 📘✨

Good luck!

markdown ## What is one of the unique features offered by segregated funds? - [ ] High liquidity - [x] Maturity guarantees - [ ] Tax deductions - [ ] Daily dividends > **Explanation:** Segregated funds offer maturity guarantees, death benefits, and creditor protection, which distinguish them from other managed products. ## What is the minimum statutory maturity guarantee required by provincial legislation for segregated funds? - [x] 75% - [ ] 85% - [ ] 90% - [ ] 100% > **Explanation:** Provincial legislation mandates at least a 75% maturity guarantee over a minimum 10-year holding period or upon the death of the annuitant. ## What is a benefit of a maturity guarantee in segregated funds? - [ ] Limited potential returns - [x] Protection from loss of invested capital - [ ] Immediate liquidity - [ ] Tax exemptions > **Explanation:** A maturity guarantee allows investors to participate in rising markets without a limit on potential returns while protecting the invested capital from loss, subject to the 10-year holding period. ## What restrictions might insurance companies impose on enhanced 10-year maturity guarantees? - [ ] Minimum investment amounts - [ ] High annual fees - [ ] Restricted withdrawal options - [x] Age restrictions for the annuitant > **Explanation:** Insurance companies may require that the annuitant be no older than 80 at the time the policy is issued, or impose reduced protection after a certain age to qualify for enhanced maturity guarantees. ## What happens to the maturity guarantee when a segregated fund contract is renewed? - [x] It resets for another 10 years - [ ] It gets reduced by half - [ ] It remains unchanged - [ ] It expires > **Explanation:** Upon renewal, the maturity guarantee resets for another 10 years, allowing contract holders to lock in current market values and set new maturity dates. ## How can reset dates benefit contract holders in segregated funds? - [ ] By reducing management fees - [ ] By maximizing tax benefits - [ ] By limiting market participation - [x] By locking in accumulated gains in rising markets and providing protection in falling markets > **Explanation:** Reset dates enable contract holders to lock in gains in rising markets and offer protection based on previous highs in falling markets. ## Which of the following best describes the death benefits feature in segregated funds? - [ ] Guaranteed returns up to 150% - [ ] Annual dividend payouts - [x] Payouts to beneficiaries based on the guaranteed amount and the net asset value at death - [ ] Early retirement benefits > **Explanation:** The death benefits guarantee that beneficiaries or estates receive at least the guaranteed amount, minus sales commissions and specific fees, based on the net asset value of the funds at the time of death. ## What amount does Patricia receive as a death benefit when the market value of Keith’s segregated fund is $80,000, given a 75% guarantee? - [ ] $75,000 - [x] $80,000 - [ ] $55,000 - [ ] $65,000 > **Explanation:** Since the market value of Keith’s segregated fund at his death is $80,000, Patricia receives this amount, as it is greater than the 75% death benefit guarantee of $75,000. ## Why do segregated funds offer creditor protection? - [ ] They invest only in government bonds - [ ] They have guaranteed returns - [x] The assets are owned by the insurance company, not the contract holder - [ ] They are not subject to market risks > **Explanation:** Creditor protection is available because a segregated fund's assets are owned by the insurance company, making them generally exempt from bankruptcy legislation. ## How can segregated fund contracts help in estate planning? - [ ] By offering tax-free returns - [ ] By requiring minimal paperwork - [ ] By increasing probate costs - [x] By allowing proceeds to bypass probate and pass directly to beneficiaries > **Explanation:** Segregated fund contracts are not part of the deceased's estate; thus, the proceeds pass directly to beneficiaries, bypassing probate and saving on associated fees.

📢
Exciting News!

🚀 Launch Date: April 14th

🎉 Now On App Store!

📱 Available on iPhone and iPad

📚 Master the CSC® Exam with our top ranked iOS app! Packed with thousands of sample questions, it's your perfect study companion for acing the Canadian Securities Course Certification exams!

🎯 Achieve Your Professional Goals with ease. Try it now and take the first step towards success!

🌟 CSC Exam Questions 🌟

Download Today!

Tuesday, July 23, 2024