Insurance That Invests.
Investments That Guarantee.
Here's How Seg Funds Do Both. If you've got $100K-$500K to invest and you want market returns but you're uncomfortable with "you could lose it all"... Segregated funds solve that dilemma.
Seg Funds Explained: Insurance-Wrapped Investments
"What You Get: Growth Potential + Downside Protection"
The Basic Mechanics
A segregated fund is an investment fund wrapped inside an insurance contract. Your money goes into a basket of stocks/bonds/diversified assets, and you get two guarantees:
Maturity Guarantee
After 10 years, you're guaranteed to get back at least 75% (or 100%) of what you invested, regardless of market performance.
Death Benefit Guarantee
If you die anytime, your beneficiary gets at least 75% (or 100%) of your deposits, even if markets crashed yesterday.
Example Scenario: Why This Matters
Paul, age 55, invests $100K in a seg fund with 75% guarantee.
Scenario A (Bull Market):
Year 1-3: Markets boom. Fund grows to $150K. He hits "Reset," locking in gains. New guarantee = 75% of $150K = $112,500. Year 4-10: Markets crash 40%. Fund drops to $90K. Day 1 of Year 10: Maturity date. He gets $112,500 (his guarantee). Upside captured. Downside protected.
Scenario B (Bear Market):
Year 1-10: Bad luck. Persistent recession. Fund shrinks to $60K. Day 1 of Year 10: Maturity date. He gets $75K (his 75% guarantee). He didn't lose the full amount.
Seg Funds vs. Mutual Funds
| Feature | Mutual Fund | Segregated Fund |
|---|---|---|
| Guarantees | None. You can lose everything. | Min. 75% maturity + death guarantee |
| Probate | Subject to probate | Bypasses probate if beneficiary named |
| Creditor Protection | No protection | Potential protection if "Family Class" beneficiary |
| Cost (MER) | Lower (0.5-2%) | Higher (1.5-4%) — pays for guarantees |
| Death Value | Whatever it's worth that day | Minimum 75-100% of deposits |
The "Reset" Strategy (This Is Powerful)
You can reset your guarantee anytime. Why you'd do this:
- Lock in gains you don't want to lose
- Raise your guaranteed floor to match new investment value
- Restart the 10-year maturity clock
Example with Numbers
Sarah invests $50K at age 55. Markets boom for 3 years → now worth $75K. She hits reset. Old guarantee: 75% of $50K = $37.5K. New guarantee: 75% of $75K = $56.25K. New maturity date: Year 13. Even if markets drop to $40K by year 13, she gets $56.25K. She captured upside and protected it.
Who Should Use Seg Funds?
Scenario #1: The Conservative Investor Over 50
You want growth but can't stomach the idea of losing 30% in a market crash. Seg funds are perfect for you.
Scenario #2: Estate Planning
You have assets to pass to heirs. Seg funds bypass probate, go directly to beneficiaries, and are tax-efficient.
Scenario #3: Business Owner / Professional
You have high income, own a business, and want tax-sheltered growth. Seg funds let you invest outside an RRSP and still get tax-deferred growth.
Scenario #4: Creditor Protection
If your business gets sued and you lose a judgment, creditors can't touch seg funds if a "Family Class" beneficiary is named.
Advanced Planning: Corporate-Owned Life Insurance + Tax Efficiency
The "Tax Triangle" for Business Owners
This is the #1 reason wealthy Canadians and business owners own permanent life insurance (whole life or UL). Here's how it works:
Business buys a $500K life insurance policy on the owner.
Owner dies. Business receives $500K death benefit (tax-free).
That $500K goes into the Capital Dividend Account (CDA) (a tax-free account inside the corporation).
The corporation pays a tax-free dividend to shareholders equal to the CDA balance.
Family receives the money tax-free.
Real Example
David owns a consulting firm worth $2M. He carries $500K of corporate-owned whole life insurance. Scenario A (Without Insurance): David dies. His estate owes ~$600K in taxes on the $2M business. His family has to sell the business to pay taxes. Scenario B (With Insurance): David dies. The business gets the $500K death benefit. A portion of that immediately pays the tax bill. The rest goes to the family tax-free. The business doesn't have to be sold.
Explore Tax-Efficient Insurance Strategies
For business owners and high-income earners, insurance isn't just protection—it's tax planning.