Segregated Funds

Hello again,

The following message isn't for everyone.

An important aspect of planning your investments and your financial future is risk management. Of course, this is where a qualified professional can come in handy... Nonetheless, let's have a conversation about the stuff nobody wants to have a conversation about.

What are some of the risks you'll face as you work toward executing your financial strategies? Here are a few to consider:

- you get sick, can't work, and therefore have no income
- you die
- you divorce, your spouse takes half of everything, alimony and/or child support take a large chunk of your income
- you get fired, laid off, downsized.
- a fire or other natural disaster destroys your home and everything in it.
- your business fails
- you get sued

I'm sure there are more, but I'm not trying to freak you out or otherwise depress you. What I'm trying to do is to demonstrate that, irrespective of all of the hard work we do to earn an income and save some money, there are going to be times when events conspire to ruin good people.

So, what can be done? Briefly, get some insurance. In most of the situations mentioned above (except the marital ones, those issues are outside of my purview of expertise), different types of insurance can help offset the risk.

Did you know that there was a way to protect your investments in the event that your business fails or you get sued? There is. Use segregated funds.

Segregated funds work very similarly to mutual funds, except that they are an insurance product. Essentially, you, the insurance contract owner, owns the insurance contract. The insurance contract has contractual claim to the investment assets.

The brilliant part of this arrangement for the contract holder is that, because its an insurance contract, its governed by insurance legislation. Because of that, it cannot be seized by creditors*.

So, if you get sued or become insolvent, your segregated funds should be safe, whereas had your portfolio been constructed exclusively of mutual funds, stocks, bonds and real estate, all of your assets would be at risk.

Another little known benefit of segregated funds is that, because they are an insurance product, they are paid out upon death directly to the beneficiary and therefore circumvent probate. For most, this is likely a non-issue. However, probated wills are public documents, viewable by anyone. Did you know that? Some people would prefer some discretion in certain circumstances (sensitive family issues, mistresses, general privacy concerns, etc.) and would benefit from having some of there assets in an insurance vehicle such as segregated funds.

Now, with all that said, I'm not here to tell you that segregated funds are the end all be all of investing, because they're not. I've spent a lot of time searching for good ones, and there aren't many. Also, they tend to be more expensive to own, as there are certain guarantees inherent in them that standard mutual funds don't have, such as guarantee of principal. So, they're not for everyone all the time, but they can fill a niche for some folks such as business owners and professionals which other products simply cannot.

* - According to the Canadian Life and Health Insurance Association:

• Potential creditor protection
When the contract’s named beneficiary is a spouse, child, grandchild or parent of the insured person (or, in Quebec, the contract owner), when the beneficiary is designated irrevocably or, in some provinces, where the contract is registered (for example, as an RRSP), creditors cannot seize a segregated fund contract if the contract owner declares bankruptcy or fails to pay his or her debts, as long as he or she has not entered into the contract for the primary purpose of shielding assets from creditors. In some instances, courts of law have deemed the purchase of segregated fund contracts while the creditor was insolvent as an attempt to shield assets, and disallowed the creditor protection.

**(from the CLHIA Guide to Segregated Fund Contracts)