Gabriel Lalonde
July 20th, 2022

Segregated Funds and the Protection They Offer From a Volatile Market

No one can confidently predict the next volatility round in the market. For example, almost no one saw 2020’s effects on investment portfolios. The same can be said about the subprime crisis of 07/08 and the shakeup of the Chinese stock market in 2015/2016.

If you are a Canadian investor looking to maximize investment benefits in such uncertain periods, then segregated funds may be suitable for you.

What are segregated funds?

A segregated fund is a contract between you and a life insurance company, allowing you to invest in a specific underlying asset, such as a mutual fund, at a lower risk than usual. Funds comprise multiple investments – commodities, bonds, stocks, or other securities – that ensure your investment portfolio stays diversified. Segregated funds have the same fundamentals, except that they are only available from an insurance company, unlike other funds you can purchase from a brokerage.

The insurance coverage that comes with segregated (seg) funds offers additional security to investor clients who are worried about the volatile nature of the market, future bear seasons, or market corrections. It is even better because this extra security does not deprive them of the possibility of getting higher returns. And these are the reasons Ottawa certified financial planners often recommend them.

Segregated Funds and Principal Guarantees

Segregated funds are designed to give investors a guarantee over all or part of their principal (70-100% in most cases). Earnings are not 100% guaranteed, but investors can expect considerable returns at the end of the contract, irrespective of any withdrawals made along the line. The higher the principal guarantee, the higher the fees or expenses payable on the segregated fund purchased. For example, you will spend more fees on a segregated fund with a 90% principal guarantee than one with a 75% guarantee.

A contract backs every segregated fund. The duration of these contracts varies, with some lasting up to 15 years. Once they sign the contract, the investor is no longer in control of their segregated fund until the end of the contract. Investors who opt to cash out entirely before the end of their contract will get the current market value of their underlying investments. However, this is often considerably lower than their initial deposits. Such early withdrawals also often attract penalties payable to the insurance company for breaking the contract, plus other fees associated with the segregated fund usually.

Segregated Funds and Death Benefits

If something happens to a segregated fund investor before the end of their contract, the life insurance company will pay their beneficiaries directly. The beneficiaries, in this case, could be the kids, spouse, or someone the investor named in their contract. Once the demise of the investor is confirmed, the designated beneficiary gets either the guaranteed principal or the market value of the fund’s investments, depending on which is higher.

Segregated Funds and Resets

Aside from the principal guarantee, seg funds can also protect investors from market volatility through the availability of “resets.” This option allows clients to lock in the value gains of the fund’s underlying assets. For instance, if an investor resets when prices are at the highest, the guaranteed amount of the fund increase to match the increased market value.

This puts investor clients in a great position to maximize upside gains, even when asset values eventually drop while the contract is still valid.


The combination of security and performance is enough to shield investors from the uncertainties of investments. That is why your Ottawa CFP would recommend taking advantage of the protective features of segregated funds as a way to deal with the emotional aspects of investing, especially in uncertain times like volatile markets.

Do you have questions? Contact us today!

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