A reader commented on how Segregated funds can work well with the Smith Manoeuvre, so I decided to do some digging into this investment vehicle.

From my research, segregated funds are similar to mutual funds except that they are sold by insurance companies. How are they different? They are different in 4 main ways:

  1. Their guarantee of principal
  2. The fees associated with them
  3. The ability to bypass probate fees
  4. Protection from Creditors

Guarantee of Principal:

Provincial legislation states that if a policy holder purchases a segregated fund for a 10 year term or longer, the segregated fund must guarantee at least 75% of the invested capital. Some segregated funds provide greater than 75% capital protection if you invest longer than 10 years.

The Fees Associated with Segregated Funds:

There is no doubt that Segregated funds are more expensive than mutual funds. This is due to the guarantee that these funds provide. The higher the guarantee, the higher the Management Expense Ratio (MER) involved. From the funds that I’ve been looking at, MER’s range from 5-6% for a 100% guarantee, 3-5% for 75% guarantee, and 2-3% for no guarantee.

Ability to Bypass Probate Fees:

As a segregated fund is basically an insurance policy, the beneficiary of the policy will be given the insurance proceeds without having to pay any probate fees.

Protection from Creditors:

If I were to pass away today with debts, my estate would be responsible for paying for it. If I had a segregated fund, my beneficiary(s) would obtain the insurance proceeds without having to pay off my estate first. Also, if I owned segregated funds and was facing bankruptcy, the segregated fund is protected from creditors (some exceptions apply).

How can I buy them?

As stated above, Segregated funds are insurance policies, so the salesperson must be a qualified insurance sales rep.

As I have never purchased a segregated fund before, this is a very basic review on how it works. As mentioned by a comment on the Smith Manoeuvre, this may be a viable way to protect your capital while performing the Smith Manoeuvre. In my opinion though, they are far too expensive from an investment standpoint.

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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9 years ago


Although I am entering this duscussion well beyond its initial posting, just for the record, there is no such word as ‘spelt’ unless you are British. Otherwise here in Canada (and in the USA) the more common version is ‘spelled’

12 years ago

It should be spelled as “principal” in this context. Check your local dictionary or dictionary.com.

12 years ago


The principal reason for correctly spelling ‘principal’ is that those individuals (and I’m not sure if they are in the minority or not) went to school where the principal had many cherished principles – principal among them was gooder grammar and korrect speling.

Or, there is an accepted principle that to reduce your mortgage balance quickly, divert a principal portion of discretionary income towards the principle.

12 years ago

I stand corrected. It’s a mistake I was making too! The correct spelling for monetary principle is ‘principal’ so it should read ‘The Guarantee of Principal’.


12 years ago

Kay: I hate to break it to you but ‘principal’ is an adjective that means primary and is most often used to describe the principal of a school.

Principle is a noun which means a general truth or assumption.

FT used the correct spelling. So many people spell it this way because they are right!

12 years ago

The word Principle is spelt PRINCIPAL. Why do so many people always make this mistake? thank you

Carl Brodie
12 years ago

Hi c-drive,

“The benefits are not worth the added expense. There hasn’t been a 10 year period in the history of the NA equity markets where the protection criteria would prove to be valuable.”

Welcome to the first time in North American history where the protection criteria was valuable.

Frugal Trader

Manulife has the 75 series which generally has MERs within the 2-3 range. They are usually not more than 30 bps higher than a mutual fund.

If you need some protection, it is not such an extortionate fee.


13 years ago

Garbage products. The benefits are not worth the added expense. There hasn’t been a 10 year period in the history of the NA equity markets where the protection criteria would prove to be valuable. Not to mention that it’s even worse for money market, income and balanced seg funds.

Index funds provide an MER of 1% and no fees or comissions with all the growth potential.

If you value creditor protection above all, you’re a loser anyways.

Thicken My Wallet » Blog Archive » 5 Investment Products I Avoid
13 years ago

[…] These are basically mutual funds which are offered by insurance companies. The funds are insurance products so they have the advantages of creditor proofing (creditors cannot attack insurance contracts in most cases but there are exemptions), estate planning (no probate is paid by the estate) and principal protection (if the funds are held for a certain period of time). Million Dollar Journey gives a more detailed summary on segregated funds. […]

13 years ago

Don’t compare straight seg funds (also called annuities, or variable annuity contracts) with the investment portion of a Universal Life policy in terms of fees. The UL’s are much higher. There are seg funds that have MER’s of 2.1% for with 75% guarantee for instance. And that is with 90% equity holdings, 10% guaranteed securities – plus automatic re-balancing over the years (80-20, 70-30, etc.) which makes sense when it’s an RRSP account. Legally speaking, the investment portion of a UL is in fact a type of annuity. Upon death the beneficiary gets the life insurance proceeds as well as the investment portion tax free, however all of the income tax is collected by the government beforehand in case of an RRSP account. The remainder is probate and/or capital gains free, unlike a non-annuity investment (i.e. mutual fund, GIC, property, etc.) which can incur probate and/or capital gains. Only RRSP accounts transferred to the spouse avoid capital gains and the subtraction of income tax. The subject of UL requires special attention because of the nature of the product. One must understand each in detail in order to draw comparisons.