Protection for your capital

Segregated funds get their name from the fact that their holdings are kept separate from the insurance company's assets. Unlike mutual funds, seg funds are life insurance contracts that offer protection on your money. For example, Standard Life's segregated funds guarantee 75% of your net deposits on the contract maturity date provided the funds have been invested for at least ten years. In the case of death, 100% of your net deposits are guaranteed.

If you withdraw some or all of your investment before the holding period is up, the guarantee doesn't apply. So you can lose money if the market falls and withdraw your money early. However, if you need the growth potential available from mutual funds, but also want some protection for your capital, seg funds may be suitable for you.

Potential creditor protection

A seg fund can be protected if you go bankrupt and have designated a 'preferred class' beneficiary. Anyone who deliberately moves assets into a seg fund to avoid their debts could lose this protection. Creditor proofing is lost if your seg fund is in a regular self-directed RRSP or self-directed
RRIF.

Avoiding costs and delays of probate

A legal process called probate allows assets to be transferred at death to your beneficiaries. Provincial governments raise money from this by charging probate fees - a percentage of your estate's value. However, these fees aren't charged on seg funds because this asset doesn't flow into your estate if you have a designated beneficiary.