Segregated Fund Contracts and Guarantees
Segregated fund contracts are individual variable insurance contracts (IVICs). The contract holder owns the policy, the annuitant’s life determines the death benefit and maturity events, and the beneficiary receives proceeds. The insurer provides guarantees: a maturity guarantee (commonly 75% or 100% of deposits adjusted for withdrawals and fees) and a death benefit guarantee. Guarantees apply to the deposit base, not the fund’s market value. Resets can lock in gains and raise the guarantee, but they may restart the maturity period and increase insurance costs. Creditor protection and probate avoidance are often cited, but they depend on beneficiary designation, provincial law, and the contract.
Traps: questions often confuse contract holder, annuitant, and beneficiary; one person can hold both contract holder and annuitant roles, but they are not the same concept. A withdrawal reduces the guarantee proportionally even when markets are down. A 75% guarantee is not 75% of the current value. A reset is not free, and the maturity date is not the same as the client’s holding period.
Rule of thumb: calculate the guarantee base first, then reduce it by the percentage withdrawn. Example: deposits total $100,000 with a 100% maturity guarantee. The contract value is $80,000 and the client withdraws $20,000, which is 25% of the value. The guarantee falls by 25%, from $100,000 to $75,000.