Segregated Funds Vs Mutual Funds

The term "Mutual Fund" is often used generically, to cover a wide variety of funds where the investment capital from a large number of investors is "pooled" together and invested into specific stocks, bonds, mortgages, etc.

Since 1961 life insurance companies have been offering "Segregated Funds", the insurance companies' version of Mutual Funds, with some similarities and many important differences.

The basic differences between segregated funds and mutual funds are shown in the following table, however, more important differences are revealed if you read further.

Mutual funds are regulated under the provincial securities regulators and segregated funds are regulated by the provincial insurance officials. Mutual funds are offered through a prospectus filed with the provincial securities commission and segregated funds are offered through an information folder. Most mutual funds and segregated funds are available on a deferred sales charge basis.

Like mutual funds, the segregated fund policy holder has no ownership rights in the assets of the fund. They remain the property of the insurance company. Segregated fund units and mutual fund shares are units of value, where the policy holder owns an interest but not a piece of property. According to the market value of a specified group of assets, the insurance company must maintain separate funds with separate assets for each fund.

Segregated Funds are actually variable deferred annuity contracts with insurance protection in the event of death. It is this insurance component that brings together many of the benefits of segregated funds. At death, proceeds of a segregated fund can pass directly to a named beneficiary, and are not subject to creditor's claims, probate, lawyer's or executor's fees. As long as a preferred beneficiary is designated, creditor protection exists during the policy holder's lifetime even if a bankruptcy occurs. Mutual funds don't have this protection, since, upon death, they become part of the deceased's estate and are subject to taxes, legal, executor and probate fees.

Segregated Funds offer guarantees at maturity (ten years from date of purchase) or death on the limit of potential losses - 100% of original deposits, less any withdrawals, are guaranteed which makes them an attractive alternative for the cautious and/or long term investor. No such guarantees exist for mutual funds and it is possible to have little or nothing left at death or plan maturity.

To the extent that the maturity and death guarantees of segregated funds are applicable, these same amounts are covered up to $60,000 by CompCorp, the insurance company protection association, when you have such an investment with one of CompCorps member companies. Mutual Funds are not covered in like manner under CDIC, the equivalent bank insurance coverage.

If you purchase non-registered mutual funds towards the end of a calendar year, you could pay tax for a year's worth of capital gains even though you did not own units for a whole year. With segregated funds, income is allocated monthly so you don't have to pay tax on gains that arose before you owned units.

Non-registered segregated funds have an additional tax advantage over mutual funds. If a segregated fund loses capital in a given year, the unit holders can claim the capital loss on their taxes and offset any capital gains made on other investments. Taxation rules allow the allocation of capital gains or losses without cashing in the units held. Mutual funds do not have the ability to allocate. They distribute gains or losses and a loss cannot be distributed. The only way to declare a loss with a mutual fund is to sell the units held.