What Are Segregated Funds?

Segregated funds are investment products which are insurance policies. They are well-suited to investors seeking both principal protection and growth potential. Segregated Funds resemble mutual funds in some ways:

• Professional management, available in different asset classes (equity, bond, balanced and money market funds) to suit your personal investment goals
• Fluctuating unit prices that reflect their net asset value
• Redeemable at any time
• Generally RRSP and RRIF eligible

However, Segregated Funds are different from mutual funds in other ways:

• Special features, such as principal guarantees and death benefits
• Typically higher management fees than similar mutual funds, due to the added benefits they provide

Special Features

Guarantees**

Guarantees of the original value of your investment are provided. Segregated funds must provide a 75% guarantee while some may provide for a 100% guarantee. These guarantees only apply in certain circumstances:

• Death Benefit Guarantee: If the investor dies while holding the fund, the issuer will provide at minimum a 75% guarantee of the original investment. Some issuers provide for a higher cost, a 100% death benefit guarantee.
  
  
• Maturity Benefit Guarantee: Most issuers guarantee at least 75% of the original investment at a specified maturity date, which is typically 10 years from the date of deposit.
  
  
• Whether at death or at maturity, guarantees pay the guaranteed amount or market value, whichever is higher. Withdrawals from a fund prior to maturity or death will reduce the guarantee amount, usually by a proportional amount.

Lock in Capital Growth (the Re-Set Feature)

In many cases investors are permitted to lock-in capital growth.

This allows you to take advantage of an increase in the value of your funds by establishing a new guaranteed amount and maturity date, thus locking in your capital growth without having to redeem your funds and realizing a capital gain.

Reducing Probate Fees

Probate fees can be reduced by naming a beneficiary for your segregated funds held outside your RRSP or RRIF.

Many institutions require that a Will be probated (i.e. certified by a court to be the valid Will) before releasing assets to beneficiaries. Probating a Will can be costly, typically ranging $5 to $15 per $1,000 of assets, depending on the jurisdiction, size of the estate and types of assets involved. In most instances, you can designate a beneficiary to your registered assets (such as RRSPs and RRIFs), which means their ownership generally goes directly to the beneficiary and in this way they may not form part of your estate.

Most non-registered assets (such as stocks, bonds and mutual funds held outside a RRSP or RRIF) must pass through your estate and are subject to probate fees. Non-registered segregated funds, however, as an insurance product, allow you to name a beneficiary, thus avoiding probate fees.

Potential Creditor Protection

In certain situations, segregated funds may also offer creditor protection; in many cases, insurance benefits may not be seized by creditors who may have a claim on your estate if you have named an appropriate beneficiary.

Fund Families

ScotiaMcLeod Direct Investing* provides access to the following segregated fund families:

• Canada Life
• CI
• Mackenzie Financial
• Manulife
• Transamerica imaxxGIF

On eligible segregated funds, you can make your purchase on a zero front-end load basis.

* All insurance products are sold through ScotiaMcLeod Financial Services Inc., the insurance subsidiary of Scotia Capital Inc., a member of the Scotiabank Group.

** A complete outline of the various guarantees offered by each insurer is contained in the Segregated Fund Information Folder, a detailed document prepared by the insurer. The Information Folder should be read carefully before making an investment.

Subject to any applicable death or maturity guarantee, any part of the premium or other amount that is allocated to segregated funds is invested at the risk of the contract holder and may increase or decrease in value according to fluctuations in market value of the assets in the segregated fund.

ScotiaMcLeod Direct Investing is a service of Scotia Direct Investing, a division of Scotia Capital Inc., member CIPF.

Scotia Direct Investing does not provide investment advice or recommendations and investors are responsible for their own investment decisions.