Segregated Funds and Annuities
Core concepts
Segregated funds are individual variable insurance contracts. The contract holder owns the contract, the annuitant's life measures the contract, and the beneficiary receives proceeds. They offer maturity guarantees, often 75% or 100% of deposits less withdrawals, at a maturity date typically ten years out, plus a death benefit guarantee. Resets can lock in gains but may restart the maturity date and change the guarantee base. A named beneficiary can allow estate bypass; creditor protection may apply. Fees are generally higher than mutual funds.
Annuities have accumulation and payout phases. A life annuity pays for life; a term-certain annuity pays for a fixed period; a joint-and-survivor annuity continues to the survivor. Registered and non-registered annuities are taxed differently. Interest-rate and inflation risk matter, especially for fixed payments.
Traps
Guarantees apply at maturity or death, not on surrender. Withdrawals usually reduce the guarantee base proportionally. Resets may increase a guarantee but can restart the maturity clock. Do not call segregated funds mutual funds. Distinguish owner, annuitant, and beneficiary. A term-certain annuity ends at death, with remaining payments going to the estate unless otherwise arranged. Suitability depends on time horizon, liquidity needs, fees, and guarantees.
Worked example
A client deposits $100,000 into a segregated fund with a 75% maturity guarantee and a ten-year term. In year three the client withdraws $20,000. The guarantee base is reduced proportionally to $80,000, so the 75% guarantee is $60,000, not $75,000. Rule of thumb: withdrawals shrink guarantees; always read the reset and withdrawal rules before recommending a contract.