A segregated fund or seg fund is similar to a mutual fund but with added features. Like a mutual fund, a seg fund is a collection of stocks, bonds and other investments that are managed by a professional investment company. A mutual fund is a security, while a segregated fund is an insurance product.

Protection for your capital
Segregated funds get their name from the fact that their holdings are kept separate from the insurance company's assets. Seg funds are offered under life insurance policies that provide a certain protection on your money. For example, some segregated funds guarantee 75% of your net premiums on the policy maturity date provided the funds have been invested for at least 10 years. In the case of death, 100% of your net premiums are guaranteed to be paid to your beneficiary. If the annuitant is aged 80 or over at the policy issue date, the death benefit is 75% of net premiums.

If you surrender some or all of your investment before the holding period is up, the maturity benefits guarantee doesn't apply. So you can lose money if the market falls and surrender your money early. If you need the growth potential available from mutual funds, but also want some protection for your capital, seg funds may be suitable for you.

Potential for creditor protection
A seg fund can be protected if you go bankrupt and have designated a 'preferred class' beneficiary. Anyone who deliberately moves assets into a seg fund to avoid their debts could lose this protection. Creditor proofing is lost if your seg fund is in a self-directed RRSP or self-directed RRIF.

Avoiding costs and delays of probate
Probate is a legal process that certifies the validity of a will and essentially allows assets to be transferred at death to your beneficiaries. Provincial governments raise money from this by charging probate fees - a percentage of your estate's value. However, these fees aren't charged on seg funds because this asset doesn't flow into your estate if you have a designated beneficiary.

Not applicable in Quebec, notarial wills do not need to be probated by the court. For non-notarial wills, fees are nominal.

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