Segregated Funds
A Segregated Fund is an investment fund set up and operated by a life insurance company. Life insurance companies are obligated to establish distinct funds that are separated or "segregated"" from the general funds of the company; hence, the name "Segregated Funds". They operate in the same way as a mutual fund, and are effected by the same factors. However, there are some very important differences between segregated funds and mutual funds.
This segregation protects the investor in the event of insolvency of the managing life insurance company since the fund assets are held for the exclusive benefit of the unit holder.
Advantages Over Mutual Funds
Guarantees - Upon maturity of the investment contract, or death of the unit holder, Empire Financial Group guarantees you (or your beneficiary) receive the greater of the market value of the fund units accumulated or 100% of all deposits made prior to age 65 plus 75% of any deposits made after age 75 (this amount will decrease in proportion to any withdrawals from the fund). These guarantees are unique to life insurance company segregated funds and provide important safeguards against market fluctuations. In addition, CompCorp provides coverage of up to $60,000 for payment of any minimum guarantee required.
Protection from Creditors: With the proper beneficiary designation, segregated funds provide protection from creditors in the event of an unexpected lawsuit or bankruptcy. This feature is of prime importance to business owners, professionals and others that could be subject to a possible lawsuit.
Exemption from Probate: In the event of your death, a segregated fund with a named beneficiary, other than your estate, is exempt from probate, thus saving both probate and executor fees. This also ensures prompt receipt of assets by your beneficiary.
Disability Waiver Option: With this option, monthly deposits to Segregated Fund Investment Plans can be self-completing if you become disabled.
Investment Funds
The term investment fund refers to both mutual funds &/or segregated funds
An investment fund is a financial organization through which individuals may invest their money. To this extent, investment funds are similar to banks and other financial institutions. The idea behind the investment fund is "better investment through collective investing," that is to say, pooling the investments of thousands or tens of thousands of individuals. (Source: The Investment Funds Institute of Canada).
Features of Investment Funds
- Professional investment management
- Diversification of investments
- Numerous fund types available
- Limited ongoing assessment or management necessary by investor
- Liquid investment - easily redeemable
- Monthly investment and withdrawal options available
Dollar Cost Averaging
Dollar Cost Averaging is the practice of investing the same dollar amount at regular intervals (ie: $100 per month) regardless of unit price levels. By doing this, more units are purchased when the unit price is lower. Consequently, the average cost of your units will be lower than the average price per unit. Dollar Cost Averaging allows you to take advantage of investment procedures used by many institutional investors.
Creditor Protection
Legislation provides creditor protection for contracts issued by a life insurance company where certain family members are designated as beneficiaries. Creditors may not force the surrender of the contract while the policy is in force.
Any death benefit payable under the insurance company contract is exempt from seizure by creditors where anyone other than the owner or the owner's estate is designated as beneficiary.
Under certain circumstances, this creditor protection may be lost. Other legislation has been designed to prevent individuals from fraudulently defeating the claims of their creditors, for example: no kind of creditor protection is available for annuities and RRSP's issued by a bank, trust company or Mutual Fund contract.
Beneficiary Designation
Contracts issued by a life insurance company permit the owner to designate one or more beneficiaries. This means that the death benefit will be paid directly to the person or persons named as beneficiaries when the owner dies.
There are several advantages to this beneficiary designation provision. Funds go directly to those the owner named, without becoming part of the estate settlement process. They are not subject to probate or to the fees and costs of settling an estate and they are usually protected from the claims of creditors.
Good estate planning requires careful use of the beneficiary designation provision. While it is generally recommended to name a family member as beneficiary, under some circumstances it may be more appropriate to designate the estate.
Investments made through a bank, trust company or other institution will become part of the estate when the owner dies. They must clear probate before a named beneficiary can receive the funds.
Depositors with banks and trust companies receive limited protection through the Canada Deposit Insurance Corporation, but not all investments offered by CDIC members are automatically insured.
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