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:
- Their guarantee of principal
- The fees associated with them
- The ability to bypass probate fees
- 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.