Segregated fund contracts vs. mutual funds

Sarah is 58. She’s been building her savings for 30 years and has about $400,000 in non-registered accounts. She’s planning to retire at 63. What keeps her up at night isn’t her own retirement. It’s what happens to this money if she dies unexpectedly.  

Without guaranteed protection, if Sarah passes away during a market downturn, her children inherit whatever her investments are worth at that time. She remembers 2008 and 2020, when her balance dropped significantly. The thought of her family inheriting less simply because of bad market timing bothers her.  

A segregated fund contract with a 100% death benefit guarantee means her beneficiaries receive the guaranteed amount on her contract or its current market value, whichever is higher. Sarah can also choose how that money is paid out:  a lump sum or regular income payments (payout annuity), depending on what makes sense for her family’s situation. 

There’s an added benefit. With named beneficiaries on her segregated fund contract, the money may pass directly to her children outside of probate, meaning faster access and more privacy. Rules vary by province or territory. A life insurance representative can explain how this works in your province or territory.  

The trade-off: Sarah pays extra fees for this protection. If markets perform well over her lifetime, she’ll have paid more for the peace of mind that protection provided. But for Sarah, knowing her family is protected is worth the cost. If she passes away during a market downturn, her family receives the guaranteed amount on her contract.  

Segregated fund contracts may make sense if: Protecting what your beneficiaries receive matters more than minimizing fees. This is especially true if market conditions at death concerns you.

Joyce is 63. She’s retiring next year. She’ll receive CPP and a small pension, but she needs her $250,000 in non-registered savings to help meet her lifestyle needs. She’s worried about outliving her money. Her mother lived to 97, and Joyce could live 30 or more years in retirement.  

Select segregated fund products offer a guaranteed lifetime income option. If Joyce chooses one of these products, she can receive a set amount every year for the rest of her life, regardless of market performance. The guarantee remains in place if she doesn’t take withdrawals beyond this guaranteed amount. Not all segregated fund contracts offer this feature. A life insurance representative can show her which products include this guarantee and whether it fits her needs.  

The trade-off: Joyce pays extra fees for the guarantee. But she never has to worry about her savings running out during her lifetime.  

Segregated fund contracts with the guaranteed lifetime income option may make sense if: Longevity risk concerns you and you want the certainty of guaranteed income for life. Note: this option is only available on select segregated fund products.

Robert is 52. He plans to work until he’s 67. He has 15 years before retirement. He’s comfortable with market risk and wants to maximize growth. He already has life insurance covering his family’s needs if something happens to him.  

Robert has about $200,000 saved in non-registered accounts. For him, potentially lower fees on mutual funds could mean keeping extra money in his accounts. It could potentially be more when you factor in compound growth.  

For his situation, potentially lower mutual fund fees make more sense than paying for insurance guarantees he doesn’t currently need. Robert’s decision was informed by a comprehensive review with his advisor, who helped him evaluate his existing insurance coverage, risk tolerance, and retirement timeline to determine the right strategy for his specific circumstances.  

The trade-off: Robert saves on fees but accepts full market risk. If he passes away during a market downturn, his family inherits whatever his investments are worth at that time, though his life insurance would provide additional money. If markets crash right before retirement, he might need to delay or adjust his plans.  

Mutual funds often make sense if: You have a longer time horizon before retirement, you have other protections in place, and you’re comfortable with market risk.

Margaret is 72, widowed, and remarried. She has $350,000 in non-registered savings she wants to leave her two adult children from her first marriage. Their finances are separate by mutual agreement. She’s concerned about potential complications after she’s gone. 

Margaret knows that mutual funds held in registered accounts like Registered Retirement Savings Plans (RRSPs) or Tax-Free Savings Accounts (TFSAs) allow beneficiary designations that bypass probate. But her situation is different. She has money in a non-registered account, which doesn’t offer that option with mutual funds.  

If Margaret invests in mutual funds within her non-registered account, her investments will flow through her estate. That means: 

• The assets go through probate – her Will and estate details become accessible to anyone  
• Distributions could take 6 to 18 months or longer depending on estate complexity 
• If her Will is challenged by any party, these assets could be tied up in the courts 
• Depending on her situation, creditor claims against her estate might affect these assets 

A segregated fund contract lets Margaret name her children directly as beneficiaries on the contract.

When she dies: 

• The money may pass directly to her children outside her estate, potentially bypassing probate (rules vary by province/territory) 
• The transfer is private – no public record 
• Her children typically receive the money within weeks instead of many months 
• Potential creditor protection may apply (conditions vary based on circumstances) 

For Margaret, the probate bypass and privacy features alone justify the extra fees. She knows exactly where this money is going, and she’s protecting it from potential estate complications. The death benefit guarantee is an added protection – her children receive 75% or 100% of what she contributed depending on the product she chose (or more if markets perform well), even if she dies during a market downturn.  

The trade-off: Margaret pays higher fees than she would with mutual funds. But she gains certainty, privacy, and protection from potential estate disputes that matter more to her than cost savings.  

Segregated fund contracts may make sense if: You have a blended family, complex estate situation, or want to ensure specific assets pass directly to chosen beneficiaries outside your Will with privacy and potential protection from estate challenges or creditors.