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Segregated Funds Contents

Chapter 1 Introduction ........................................................................................................................................ 1

Introduction ........................................................................................................................................................ 1

What are Segregated Funds? .............................................................................................................................. 1

Who Can Sell Seg Funds? .................................................................................................................................. 2

Who Can Buy Seg Funds? ................................................................................................................................. 2

What is the History of Seg Funds? ..................................................................................................................... 2

Chapter 2 Features of Segregated Funds ........................................................................................................... 3

Features of Segregated Funds ............................................................................................................................ 3

Features Shared by Segregated Funds and Mutual Funds .................................................................................. 3

Professional Management .............................................................................................................................. 5

Regular Investment ........................................................................................................................................ 5

Regular Reporting .......................................................................................................................................... 5

Diversification ............................................................................................................................................... 5

Use for Registered Plans ................................................................................................................................ 5

Automatic Reinvestment of Allocations ........................................................................................................ 6

Ability to Transfer Between Funds ................................................................................................................ 6

Features Exclusive to Segregated Funds ............................................................................................................ 6

The Maturity Guarantee ................................................................................................................................. 6

The Death Benefit .......................................................................................................................................... 7

The Bypass of Probate ................................................................................................................................... 8

Creditor Protection ......................................................................................................................................... 8

Bankruptcy Protection ................................................................................................................................... 8

The Reset Feature .......................................................................................................................................... 9

Favourable Tax Treatment ........................................................................................................................... 10

Time-Weighting ........................................................................................................................................... 10

Disability Waiver Option ............................................................................................................................. 10

Foreign Content ........................................................................................... Error! Bookmark not defined.

Chapter 3 How is a Seg Fund Sold? ................................................................................................................. 11

How is a Seg Fund Sold? ................................................................................................................................. 11

Acquiring the Contract ..................................................................................................................................... 11

Determining the Type of Account .................................................................................................................... 13

Choosing a registered pension plan account: ............................................................................................... 13

As a locked-in plan: ..................................................................................................................................... 13

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Choosing an RESP account: ........................................................................................................................ 14

Receiving the Necessary Documents ................................................................................................................ 14

The Purchase Details ........................................................................................................................................ 16

Rights of the Contract Holder ...................................................................................................................... 16

Chapter 4 Client Needs ...................................................................................................................................... 17

How to Pick the Right Fund for Each Client .................................................................................................... 17

How to Match Funds to Client Risk Tolerance ................................................................................................ 18

Fund Risk-Return Chart ............................................................................................................................... 18

Chapter 5 Answers to Other Important Questions ......................................................................................... 21

How Can Performance be Tracked? ................................................................................................................. 21

How is the Fund’s Value Determined? ............................................................................................................ 22

How Does Value Grow? .............................................................................................................................. 24

What are the Fees and Sales Charges? ............................................................. Error! Bookmark not defined.

Chapter 6 Sales Charges and Investment Decisions ........................................................................................ 27

Sales Charges and Investment Decisions ......................................................................................................... 27

Chapter 7 Taxation of Segregated Funds ......................................................................................................... 27

Taxation of Segregated Funds .......................................................................................................................... 31

Annual Taxation Issues .................................................................................................................................... 31

Taxation of Dividends ...................................................................................................................................... 32

Maturity Guarantee Tax Issues......................................................................................................................... 34

Death Benefit Tax Issues.................................................................................................................................. 35

Taxation of Registered Accounts ..................................................................................................................... 35

Taxation of Non-Registered Contracts ............................................................................................................. 35

Chapter 8 The Regulation of Segregated Funds .............................................................................................. 37

The Regulation of Segregated Funds ............................................................................................................... 37

Money Laundering AND IVICS ..................................................................................................................... 38

Chapter 9 Which Clients Best Suit Seg Funds? ............................................................................................... 39

Which Clients Best Suit Seg Funds? ................................................................................................................ 39

Risk Averse ...................................................................................................................................................... 39

Age Factors ...................................................................................................................................................... 39

Clients Who Are Financially Secure ................................................................................................................ 40

Entrepreneurs, Small Business Owners, Corporate Directors and Professionals ............................................. 40

Investors Over 55 Needing Estate Preservation Benefits ................................................................................. 40

Investors in Poor Health ................................................................................................................................... 40

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Chapter 1 Introduction

Introduction • The financial advisor must acquire a life insurance license to sell segregated funds. While

segregated funds are a close cousin to mutual funds, there are some significant differences between the two investment products. An understanding of segregated funds will include:

o their features o the buying process o tracking performance o determining the value of a fund o tax implications o regulation o finding the right clients

What are Segregated Funds? • A segregated (“seg”) fund is a pool of assets held by an insurance company. These assets are

separate (hence, segregated) from the other assets of the insurance company.

• Each insurer offers many types of segregated funds from which their customers can choose, since various segregated funds suit various client needs.

• Often, segregated funds and “IVICs” are discussed interchangeably by members of the insurance industry. This is because seg funds are acquired through an insurance contract: the Individual Variable Insurance Contract (IVIC).

• It is important to understand that the seg fund and the IVIC are two legally distinct entities and that the IVIC gives the contract holder the right to buy an investment; the investment is available as segregated funds, or fixed term guaranteed rate or daily interest accounts.

• Specifically, an IVIC is a variable annuity contract and for this reason is taxed differently than a mutual fund.

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• An IVIC is a way to indirectly acquire life insurance because evidence of insurability (that is, proof of good health) is not required for an IVIC despite the fact that guarantees on death are provided.

• Seg funds are also called Guaranteed Investment Funds (GIFs).

Who Can Sell Seg Funds? • A life insurance license is required to sell seg funds. Those who can qualify include licensed

life insurance agents, licensed financial planners and investment advisors, licensed stockbrokers, and licensed bank employees.

• Dual licensing is permitted for sales of seg funds by those with securities and insurance licenses.

Who Can Buy Seg Funds? • Individuals can buy registered and non-registered funds; corporations can buy non-registered

funds only.

What is the History of Seg Funds? • Though seg funds are still not a widely-known or well-understood investment product, they

have been available since 1961 when they were started to manage money for pension plans.

• By 1993, there was over $25.8 billion in seg fund assets held by insurers.

• In 1998, the market was opened to allow banks to sell seg funds. That year, almost $60 billion was held in seg fund assets.

• In 1990, consumer protection was provided by CompCorp. CompCorp is now known as Assuris.

• By 2000, there were over one thousand seg funds available to Canadian consumers.

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Chapter 2 Features of Segregated Funds

Features of Segregated Funds • Segregated funds offer their investors many features. • Most seg funds are brand-name mutual funds inside a life insurance contract. For this reason,

some of their features are identical to the features of mutual funds. However, other features are exclusive to segregated funds due to their insurance “wrapping”.

Mutual Fund Segregated Fund

Benefits payable no the guarantees specified in the policy contract

Consumer protection Insured by the Mutual Fund Dealers Association up to $1 million per client

provided by Assuris up to $60,000.

Creditor protection none named beneficiaries are protected; in case of bankruptcy, fund must have been held longer than one year

Death benefit none 75% of initial deposit (less any withdrawals) as a minimum

Disabilit y waiver none if deposits are made on a periodic payment schedule to the fund, they will be continued by the insurer to a maximum amount if the contract holder is disabled

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Disclosure documents prospectus: law stipulates that the document includes details on objectives, risks, sales charges, and calculation of the net asset value

information folder: can vary among companies; guidelines exist as to what the information folder must include but they are not governed by their provincial securities commission

Distribution of income only to unit holders on record at end of calendar year

time-weighted so that income is received proportionate to the length of time during the year that units are held

Estate planning issues proceeds become part of the estate and subject to probate fees

proceeds bypass probate unless estate named as beneficiary

Frequency of valuation daily and possibly weekly monthly and possibly daily

Maturity guarantees none 75% of deposits (less any withdrawals) as a minimum after 10 years; no maturity guarantee before 10 years

Nature of units unit holders have rights to vote and receive distributions

units are notional; they determine the value of benefits payable; no voting rights

Ownership of assets assets are owned by the fund assets belong to the insurer

Partial withdrawals yes yes

Risk varies according to the assets in the fund; regardless of assets risk is greater than segregated fund

varies according to the assets in the fund but risk is less than mutual funds because of the guarantee

RRSP eligibility yes yes

Sales and licensing requirements & product approval & regulation

regulation and product approval through provincial securities legislation, license from the Investment Funds Institute of Canada required for sales

regulation and product approval through provincial insurance legislation, life insurance license required for sales

Taxation of non -registered contracts

income received as interest, dividends, and capital gains; capital losses are not received by investors until units sold

income received as interest, dividends, and capital gains; capital losses are received by investors

Chapter 2 - Features of Segregated Funds

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Features Shared by Segregated Funds and Mutual Fund s • Both segregated and mutual funds provide their investors with:

o professional management o the ability to invest regularly in small dollar amounts o regular statements and reports o diversification o the ability to be held in a registered plan, such as a Registered Retirement Savings

Plan (RRSP) o automatic reinvestment of allocations o the ability to transfer between funds under one management umbrella

Professional Management • Professional money managers are hired to run segregated funds and mutual funds and deliver

the best possible results to their investors.

Regular Investment • Segregated funds and mutual funds can be purchased with a lump-sum payment or through

regular deposits. These regular deposits can be made monthly, quarterly, semi-annually, or annually. The amount of money for each deposit can be as low as $25, although each company sets its own minimum deposit requirements.

Regular Reporting • Both types of funds issue reports to their customers regularly so customers can monitor

performance and results.

Diversification • Diversification is vital in a portfolio for one important reason: it lessens risk. Mutual funds

and segregated funds acquire a wide variety of assets suitable to their “type.” A Canadian equity fund, for instance, buys shares in a number of companies to spread risk across the board.

Use for Registered Plans • Both segregated funds and mutual funds can be held in registered plans, such as RRSPs.

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Automatic Reinvestment of Allocations • Both mutual and segregated funds make periodic payments of interest, capital gains or

dividends based on the amount and type of assets held in the fund. Mutual funds “distribute” income; segregated funds “allocate” income. Whether a distribution or allocation, it can be automatically reinvested in the fund. This helps to compound growth.

N.B. The allocations of segregated funds are time-weighted; mutual fund distributions are not.

Time-weighting allocates income to the contract holder based on holdings proportionate to the amount of the calendar year the units are held. So, units that are time-weighted would receive a full allocation if held for a full year, half if held for six months, one-quarter if held for three months and so on. Time-weighting is further discussed as a feature exclusive to segregated funds below.

Ability to Transfer Between Funds • Each segregated and mutual fund management company offers a variety of funds to suit

client needs. Usually it is possible to make a limited number of switches between a manager’s funds without additional costs. Above that pre-set number, charges will apply.

Features Exclusive to Segregated Funds • Only segregated funds offer:

o a maturity guarantee o a death benefit o probate bypass o creditor protection o bankruptcy protection o the reset feature o favourable tax treatment o time-weighting o disability waiver option

The Maturity Guarantee • The maturity guarantee together with the death benefit is called the principal guarantee.

• The maturity guarantee provides for the return of at least 75% of the deposit or deposits. Some companies offer up to a 100% guarantee.

• The maturity guarantee is calculated in one of three ways:

1. When the contract is funded with a lump sum, the contract holder receives either 75% or 100% of his or her initial deposit ten years after the date the contract is signed

2. When the contract is funded with on-going deposits, at the end of each month for instance, the maturity guarantee will usually be calculated at the end of each policy

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year and the maturity date will be 10 years after the end of that year. This is called a policy-based guarantee.

3. When the contract is funded with monthly deposits, each deposit has its own guarantee amount and maturity date, ten years from the deposit date. This is called a deposit-based guarantee.

• The guarantee of receiving at least 75% of deposits gives the investor a measure of safety not found in many investments.

• The maturity guarantee means that deposits have unlimited potential for growth while limiting the risk of loss.

• For example, your client signs a contract on April 15, 2002 to acquire a segregated fund. The payment that accompanies that contract is $10,000. If the maturity guarantee is 75%, on April 15, 2012 the investor will receive at least $7,500. If the maturity guarantee is 100%, on April 15, 2012 the investor will receive at least $10,000.

• The maturity guarantee is used only when the seg fund has lost value over the period of the contract. When the fund has gained in value, the contract holder receives the market value of the investment, less fees and charges.

• For example, your client who would receive 75% of her initial investment of $10,000 on April 15, 2012 might find the market value of the seg fund is $14,876 on that date. In that case, she will receive $14,876 on the contract maturity date.

N.B. This illustration proves two key points that the financial advisor must consider when selling an IVIC. One, that the IVIC must be front-end funded for the maturity guarantee to be meaningful. A contract funded with a small initial deposit and regular deposits over time, will not have a substantive maturity guarantee at the end of ten years from the contract date. Two, the full length of the contract—ten years—must be realized when the contract is lump-sum funded.

• It is quite likely that a client will buy more than one segregated fund. In fact, a client could end up with a portfolio entirely made up of segregated funds. In this case, the maturity guarantee will be established by whether each fund is a policy-based guarantee or a deposit-based guarantee and when deposits have been made.

The Death Benefit • The death benefit is part two of the principal guarantee. It promises that the annuitant of the

contract will receive, at a minimum, the amount specified in the contract as the maturity guarantee.

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• The emphasis in describing this benefit is on the word minimum. Again, market value determines whether the guarantee amount is received or an amount greater than the guarantee.

The Bypass of Probate • Probate is a legal process in place in all provinces except Quebec. It proves that a will is the

valid last will of the person who died. It acts as a death tax because each province levies a charge against the value of assets in the estate of a person who dies. This charge may apply to bank accounts, stock portfolios, and real estate. Life insurance contracts with named beneficiaries are exempt from probate fees.

• Since segregated funds are purchased with a contract between the insurance company and the individual, segregated fund contracts are exempt from probate as long as the beneficiary is not the estate.

• There are two very real benefits to being exempt from probate: one, probate fees are saved (and these can run into thousands of dollars); two, the beneficiary can receive the money much faster than if the contract had to go through probate. Mutual funds do not offer this benefit.

Creditor Protection • Virtually everyone dies owing money to either an institution, such as a bank holding a

mortgage, or an agency, such as Canada Revenue Agency for income tax.

• People who own their own businesses are especially likely to owe money to suppliers, partners, or employees. These people or companies become creditors when the person who owes them money dies. They are entitled by law to sue the deceased’s estate to recoup their losses.

• However, creditors cannot lay claim to the proceeds of a segregated fund contract when an irrevocable beneficiary has been named in the contract. If the proceeds go to the estate because a beneficiary was not named, creditors can make claims against the estate.

Bankruptcy Protection • Similar to the protection offered from creditors, segregated funds are exempt from seizure in

bankruptcy proceedings as long as the purchase of the segregated fund was made in good faith and not to avoid debts.

• Generally, to be protected, the segregated fund must have been purchased one year or more before the individual declares bankruptcy.

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• If the investor was not solvent when the purchase was made — even if it was more than a year prior to declaring bankruptcy — any purchase made up to five years before declaring bankruptcy can be seized.

The Reset Feature • Some segregated funds allow their values to be locked in. This is called the reset feature. • The process to reset is that the investor tells the agent that he or she wants to reset (some

companies will accept verbal instructions; others need these instructions in writing) and the investor gets the end-of-day close price on the day the reset request was received.

• The number of resets per year is limited; two to four is usual. Otherwise, if the investor held an equity fund, every time stock prices went up and the value of the equity fund rose, the investor could reset!

• The result of resets is that growth in the value of the fund is locked-in. Those gains on paper become real and cannot be eroded by a downturn in the fund’s value.

• When the contract is reset, the maturity date is adjusted to 10 years from the reset date. But, the death and maturity guarantee benefits will immediately be based on the reset amount and so will be higher than when the contract was purchased.

• Here is how the reset feature works for Charles Lalonde, who opened his account on June 1, 1995, with $100,000.

How Resets Affect the Maturity Date

Date Deposit Value Reset Maturity date Maturity guarantee*

Death benefit

June 1, 1995 $100,000 June 1, 2005 $75,000 $75,000

Nov. 18, 1998 $103,000 no June 1, 2005 $75,000 $75,000

Apr. 30, 1999 $127,000 yes Apr. 30, 2009 $95,250 $95,250

Sept. 7, 2000 $141,500 yes Sept. 7, 2010 $106,125 $106,125

Oct. 12, 2001 $104,200 no Sept. 7, 2010 $106,125 $106,125

*based on 75% maturity guarantee

• Resets are not appropriate for clients who do not want their money in a segregated fund for longer than 10 years.

• There is no requirement to reset the account: it is an option.

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• Resets are an excellent feature for those who really do not care if they ever receive the value of the contract for their own use but do want to increase the amount of money their beneficiaries will receive.

Favourable Tax Treatment • Segregated funds receive favourable tax treatment because capital gains and capital losses are

reported to segregated fund contract holders. Capital losses can be deducted from capital gains going back three years or going forward indefinitely.

• Mutual fund owners receive capital gains but do not receive capital losses to offset capital gains.

Time-Weighting • As already discussed, time-weighting allocates income, capital gains and losses proportionate

to the amount of the year units are held.

• The benefit to seg fund holders is that capital gains will only be reported for the portion of the year the units are held, unlike mutual funds where capital gains are reported for the full year regardless of the length of time units were held.

• This saves the contract holder tax.

Disability Waiver Option • This option is sometimes available to pay regular deposits to the contract in the event of

disability for the length of the disability to age 65.

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Chapter 3 How is a Seg Fund Sold?

How is a Seg Fund Sold? • The steps for the contract holder in the buying process are:

o acquiring the contract o determining the type of account o receiving the necessary documents

Acquiring the Contract • A segregated fund is sold through an IVIC. An IVIC is a contract that is a legally binding

agreement between its parties and is subject to the laws that govern all contracts including restrictions on who can enter into a contract.

• Specifically, an IVIC is a variable annuity contract.

• An IVIC has a minimum of three parties: the insurance company, the contract holder, and the beneficiary.

• The contract holder is the owner of the contract. This is the person who signs the contract and is responsible for the deposit that accompanies the contract as the initial purchase and for subsequent deposits, if any.

• When the contract holder completes the contract, he or he must also designate the annuitant. This is the person to receive the proceeds on death or maturity of the contract.

• The owner and annuitant can be the same person or two different people.

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• When the contract is a registered plan (e.g. an RRSP) the owner and annuitant must be the same person. For example, for Michael Singh’s RRSP segregated fund contract, Michael Singh is the contract holder and the annuitant.

• When the annuitant is a person other than the contract holder, the contract holder must choose

someone in whom he or she has an insurable interest. For Michael Singh’s second contract (not an RRSP) he is still the contract holder but he names his wife, Becky, as annuitant. Michael could have named as annuitant his son or daughter, or Richard, his partner in his law firm.

• The contract holder also designates the beneficiary in the contract. The beneficiary receives all amounts payable if the contract holder dies. There are no rules about who the beneficiary can be, unlike those that restrict who the annuitant can be. There can be more than one beneficiary and the beneficiary can be a person (Michael Singh’s best friend Fred) or a group of people (all the members of Michael Singh’s tennis club), a group (such as a charity), a trustee (for instance, when the beneficiary is a minor), or the estate of the contract holder.

• There are reasons not to appoint the estate as beneficiary; these evolve around protection from creditors and claims on the proceeds.

• Further, as with other life insurance contracts, the beneficiary can be revocable or irrevocable.

• If the beneficiary is revocable, the contract holder can change the beneficiary as he or she chooses. In this case, the contract holder completely controls the contract.

• When the beneficiary is irrevocable, the contract holder must have permission of the beneficiary to:

o make changes including resets o make withdrawals from the contract o surrender the contract o name another beneficiary

• When a beneficiary is irrevocable, the beneficiary is, in effect, in control of the contract.

• The beneficiary can be named in the contract or in the will of the contract holder.

• If the contract holder names two different beneficiaries for the same contract — one in the will and another in the contract — the beneficiary who was designated closest to the date of death of the contract holder will prevail.

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• A segregated fund contract, even though it provides death benefits, does not require medical evidence of good health of the annuitant. Thus, it is a way for a person to obtain life insurance indirectly.

Determining the Type of Account Segregated funds are eligible to be held inside:

• registered pension plans, such as Registered Retirement Savings Plans (RRSPs) • a locked-in pension plan, such as a locked-in Registered Retirement Savings Plan

• a Registered Education Savings Plan (RESP)

Choosing a registered pension plan account: • When the client chooses the segregated fund to be held inside an RRSP, contributions will be

tax-deductible. It will not be necessary to pay tax on the income earned within the plan until the plan is terminated or funds are withdrawn.

• Withdrawals from registered plans are subject to withholding tax. • When the contract is an RRSP, it must be terminated before the end of the year that the

annuitant turns 71, converted into an RRIF, or used to purchase an annuity.

• When the contract is a registered plan, the owner and annuitant must be the same person.

As a locked-in plan: • A segregated fund contract can also be registered as a locked-in plan. This can be as a

Locked-in RRSP (also called a Locked-in Retirement Account [LIRA]) or a Life Income Fund (also called a Locked-in Retirement Income Fund [LRIF]). Locked-in plans are used when a pension is transferred from a company to an employee who is retiring or leaving the company.

• Withdrawals from these plans are strictly controlled. A schedule is set for the minimum annual payments from a locked-in plan that is determined by the age of the contract holder and when the plan was established. Alternatively, the contract holder can base payments on the age of his or her spouse. If the spouse is younger, the money in the plan has more time to grow because the payments will be less and they will be received over a longer period of time. This option is irrevocable once selected.

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Choosing an RESP account: • Segregated funds are also available for RESPs (Registered Education Savings Plans) to help

parents or other relatives save for a child’s post-secondary education in a tax-deferred environment. Contributions to the plan made by the parent are topped-up by the federal government.

• To use a segregated fund as an RESP, it is important to begin the plan before the child is eight or nine years old so that the full maturity guarantee will be effective at the time the child is ready for post-secondary education.

• The benefit of using a seg fund to save for post-secondary education is the ability to earn

larger returns while being protected from loss of the investment, just as they are for anyone buying a segregated fund.

Receiving the Necessary Documents • The prospectus is well known in the mutual fund business. It is required by securities

regulators to present all the information an investor should have about the fund in which he or she is investing fairly and impartially.

• Segregated funds are not monitored by securities regulators. They are controlled by

insurance regulators and for this reason are not required to prepare a prospectus.

• There are three documents a client must receive before completing a segregated fund contract:

1. the Information Folder 2. a Summary Fact Statement 3. Financial Statements

• The client must sign a receipt acknowledging that he or she has received these documents.

• The Information Folder is the key document describing the contract. The Information

Folder is the equivalent of the prospectus. It must be identified on its cover or first page as the Information Folder.

• The Information Folder contains the investment policy for each seg fund that addresses:

o the objective of the seg fund including its investment style o use of the fund’s earnings o disclosure of principal risks

• Other details available upon request include:

o guaranteed benefits

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o a description of benefits that are not guaranteed and that will vary according to market conditions

o how benefits are determined o maturity, redemption, and surrender options o how to make a purchase and a transfer, and the minimum dollar amounts for each,

whether lump-sum or periodic o how the price of units is determined on purchase, transfer, or withdrawal including

charges o a summary of withdrawal charges o how and when the units are valued o whether the contract will be offered continuously or for a limited time o a statement of fund investment policies and information on how the contract holder

can obtain the complete investment policy, if desired o a description of the tax status of the fund and of contract holders o a statement of current management fees as a percentage of net assets of the fund, and

other expenses that can be charged against these assets o an executive summary of one-page in length

• The Information Folder for a real estate fund will stress the long-term nature of the investment and its relative lack of liquidity.

• When the contract is held in a registered plan, the following is required in the Information Folder:

o that segregated funds are just one option for retirement savings o that there may be changes to certain regular benefits of the contract o that registered contracts are better for long-term investment than short-term o that all aspects of registration should be discussed with the agent or insurer

• Data contained within the Information Folder must not be older than three months.

• The Summary Fact Statement is the equivalent of the simplified prospectus used to sell mutual funds. Think of this as the snapshot of the fund. It includes:

o a summary of performance of the fund o investment policies o a list of its three largest holdings, though most companies provide a far more

complete list

• The Financial Statements must be provided to contract holders at the time of purchase and also annually. These audited statements must include:

o a statement of changes in net assets of the segregated fund o a statement of net assets and liabilities o a statement of operations and expenses for the previous year

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o a statement of unit values for the previous five years, if applicable o a schedule of the investment portfolio at the previous year-end o a statement of transactions in the investment portfolio of the fund during the previous

year • What can and cannot be said about segregated funds is strictly controlled and enforced by

insurance regulators. Any additional proposals must be prepared by the insurer and filed in advance with the Superintendent of Insurance.

• The agent must stress and the client must understand that past performance does not guarantee future results.

• Advertising, in all forms—print, radio, television, or any other format—for segregated funds and mutual funds must also emphasize that past performance does not guarantee future results.

The Purchase Details • The price at which the investor acquires his or her “units” is the value of a unit on the day the

order is made. If the investor chooses a money market fund, proceeds will be debited or credited to the client on the day following the order. Other types of segregated funds take three business days.

Rights of the Contract Holder • Contract holders have the following rights:

o to receive disclosure documents prior to signing the application o to receive guaranteed benefits at maturity and upon death o to receive the cash surrender value of the contract on demand o to receive notification of a merger o to designate a beneficiary o if a fund is merged, to cash-out without a fee or transfer to a continuing fund o if a fund is discontinued, to cash-out without a fee or transfer to a continuing fund

• Whereas a mutual fund investor has the right of withdrawal, the IVIC owner has no such recourse.

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Chapter 4 Client Needs

How to Pick the Right Fund for Each Client • In the securities business, a key document that all sales people must use is the Know Your

Client form. Its primary function is to assess the risk tolerance of the client on a scale from zero risk tolerance to highly speculative (maximum risk) and thus, provide a basis for the recommendations.

• There is no equivalent to the Know Your Client form for insurance agents; agents, however,

must be satisfied that they know their clients and can appropriately match funds to client risk tolerance.

• The concept of risk is turned on its head by the maturity guarantee offered by segregated

funds.

• With a segregated fund, the worry of losing money is almost eliminated. The client can invest in a product that he or she would consider far too risky outside of the protected environment of the segregated fund. But, in a segregated fund, the client knows that at least 75% of the investment will be returned. As well, the client is actually rewarded by picking risky investments because risky investments usually provide the best rates of growth and there is no upper limit as to how much the investment in the segregated fund can grow.

• There over 1,000 different segregated funds in Canada from which to choose. This diversity provides:

o a product to suit everyone o a wide range of funds within each insurance company to keep clients within the

“family” o the ability to acquire a portfolio of segregated funds that can be spread across various

asset classes o the ability to manage risk by choosing some funds that offer a 75% guarantee and

others that offer a 100% guarantee

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N.B. Some investment analysts believe there is no good reason for a segregated fund contract holder to invest in money market, mortgage, or bond funds because the level of risk for these funds, and consequently potential for returns, is already so low. However, the segregated fund contract still supplies the maturity guarantee and death benefits that are unavailable to those who buy these funds as mutual funds.

• The diversity of segregated funds allows the advisor or agent to employ portfolio diversification. Portfolio diversification is used when a client acquires more than one SEG fund and chooses to spread risk between:

o asset classes o geographic regions o portfolio managers o investment styles

How to Match Funds to Client Risk Tolerance • Client risk tolerance is revealed by the investments the investor has already made and by

asking about risk tolerance.

• The key piece of information is whether even a temporary decrease in the value of the portfolio would be acceptable to the client.

• Risk takers tend to display their willingness to take on risk in other areas of their lives. They may have a job that is risky, participate in a risky sport, or even follow leading-edge fashion or music. People who are entrepreneurs or self-employed usually have a much higher risk tolerance than those who are conventionally employed. The agent will need to get to know your client a little to be able to accurately assess the risk the client already takes, or does not take, in her or his life.

• The following FUND RISK-RETURN CHART matches funds to risk tolerance. If your client is conservative, the funds listed towards the bottom of the chart will be most suitable. On the other hand, the risky investor who has already invested in equities, for instance, can be rewarded by those funds at the top of that chart.

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Fund Risk-Return Chart The following diagram best illustrates the risk of different types of funds against the returns they offer:

High

Low

High

Global Equity

Equity Funds

Index Funds

Asset Allocation Funds

Dividends Funds

Balanced Funds

Bond Funds

Mortgage Funds

Specialty Funds

Money Market Funds

Real Estate Funds*

EXPECTED RETURNS

RISK

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Chapter 5 Answers to Other Important Questions

How Can Performance be Tracked?

• Segregated fund performance can be easily monitored in several ways on a daily basis from:

o newspapers o the Internet o information and statements from the insurance or fund companies

• Clients will receive statements from the fund manager every time they make a deposit, a

withdrawal, or a transfer between funds. • Summary Fact Statements are usually sent semi-annually and will show any changes since

the previous statement. The Statement also shows the value of the holdings and the unit value of each fund. The annual financial statement reports fund investment management and performance.

• If the client is an inexperienced or nervous investor, you may need to provide reassurance

when results fall short of expectations. You must remind your client that segregated funds are a long-term investment — ideally for a minimum of 10 years.

• Some investors will not be comfortable with this approach and may want to switch funds.

Most companies allow a maximum number of switches per year before charges apply.

• A new segregated fund cannot report performance figures until the first year of operations is complete. After the first year, results are reported for that year-to-date.

• Established funds report for the year-to-date, one year, three years five years, and 10 years.

All segregated funds report this way so comparisons between funds can be made easily.

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How is the Fund’s Value Determined? • In a mutual fund, the investor buys units or shares in the fund. These units or shares are

owned by the investor. • The segregated fund investor does not receive units or shares and does not directly own a

piece of the fund. To monitor the growth of his or her investment, and to compare that investment with other returns, the investor is assigned notional units in the fund proportionate to his or her investment. Notional units are theoretical; they give the investor a “notion” of ownership.

• The assets of the segregated fund determine the worth of the client’s investment. These assets

are represented by their market value. So, for example, the assets of an equity fund are the shares of companies bought by the fund. Their market value is what they are worth; that is, what their closing price was on the stock market, on any given day. Many equity and bond funds are valued daily. All must be valued at least every month. When the asset base is mortgages, real estate, or derivatives, their valuation follows different rules since it is difficult, for example, to value real estate on a frequent basis.

• When a segregated fund allocates income to the contract holder, the income will be time-

weighted. For example, if a contract holder was to receive $1/unit for 1000 units in the contract at the end of the year but had only had the contract for six months, he or she would receive $0.50/unit.

• The amount the contract holder receives is based on the net asset value of each notional unit.

This net asset value will determine how much the contract holder will receive when:

o the contract matures or the owner/annuitant dies o a withdrawal, called a redemption, is required o the contract is surrendered

• On maturity or death the proceeds of a contract are calculated as:

o the net asset value of the contract holder’s fund units on redemption o + (plus) the value of any guarantees or benefits o - (minus) any allowable losses, such as switching fees and early redemptions

• For example, if a contract holder bought a seg fund for $10,000 with a 75% guarantee, and the

value of the fund on maturity was $6,800, proceeds would be calculated as $6,800 + $700 (the value of the guarantee) = $7,500 minus $160 in switching fees = $7,340.

• If the contract holder owns more than one fund, each fund value is calculated separately. • A contract that is held in a locked-in plan must stay in a locked-in plan after maturity until the

contract holder retires.

• The contract holder or beneficiary can choose to:

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o receive a lump-sum payment o accrue interest on the proceeds o receive monthly installments of a fixed amount o receive monthly installments for a fixed period of time o receive a combination of fixed and variable income o receive an annuity

• The annuity option offers the owner or beneficiary three choices.

o it can be received in monthly installments guaranteed for life (minimum 10 to 15 years)

o as a joint and last survivor annuity for the contract holder and his or her spouse, or o as a variable annuity

• The variable annuity takes the units credited to the contract and converts them to annuity

units. The number of annuity units paid each month to the contract holder or beneficiary is based on his or her age, gender, and the prevailing interest rate. Payment on this number of units is guaranteed monthly, for life. However, the value of each annuity unit will fluctuate based on the performance of the segregated fund during the preceding month, so the actual payments received each month will vary.

• On death of the annuitant of a contract held in an RRIF, payments may continue over time if the beneficiary is the annuitant’s spouse, dependent children or grandchildren. If the beneficiary is someone else, the proceeds will be paid in a lump sum.

• On withdrawal, a contract holder can make a withdrawal from the segregated fund when:

o the contract is not locked-in o the annuitant/owner is alive o the beneficiary is revocable

• Withdrawals can be made in a lump sum or periodically. Sometimes the insurance company

will require a minimum withdrawal amount or that a minimum account balance is maintained. The fund contract can specify a withdrawal amount and if this amount is exceeded, a hefty early withdrawal fee (in the range of 6% in the first year) may be charged.

• When a withdrawal is made, the value of the contract decreases. The guarantees of the

contract apply to the adjusted (lesser) value. When a deposit is made, the value of the contract increases. Then, the guarantees apply to the adjusted (higher) value on maturity of the contract.

• When a withdrawal is made, the maturity and death benefit guarantees must be adjusted accordingly since the value of the contract has been reduced. This adjustment is made by either the linear reduction method (that reduces the value by the dollar amount withdrawn) or the proportional reduction method (that reduces the value according to the number of units surrendered compared to the number of units in the contract prior to withdrawal).

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• There can be a significant difference in the adjustment depending on which of these two methods is used. For example, Sarah bought 500 units in a seg fund at $20/unit, for a total value of $10,000. Two years later, the value of the units has increased to $25/unit; the total value of her investment has increased to $12,500. She withdraws $1,000 by surrendering 40 units ($1,000 ÷ $25 = 40). The balance of units in the fund is reduced to 460 (500 - 40 = 460).

• If the guarantee in her contract calls for 100% return of her initial deposit, the linear reduction method indicates a new balance in her contract of $9,000 ($10,000 - $1,000 = $9,000.)

• The proportional reduction method indicates that the value in the fund is reduced by 8% to $9,200 (460 ÷ 500 = 0.92; $10,000 x 0.92 = $9,200).

• All policy withdrawals are deemed to be partial dispositions with tax consequences, and they will decrease the ACB of the contract. The withdrawal must be reported for tax purposes and tax paid on it when appropriate.

• For example, Jan’s policy has a fair market value of $150,000 and an ACB of $140,000. She withdraws $30,000; thus she is deemed to have disposed of 20% of the contract ($30,000 ÷ $150,000 = 20%). She must therefore report a capital gain of 20% on the difference between the ACB and the fair market value of the policy of $2,000 ($150,000 - $140,000 = $10,000 x 20% = $2,000).

• Surrender of the Contract: If the contract is surrendered, the contract holder will receive the

net asset value of the units less any applicable charges. The maturity date guarantee will not apply.

How Does Value Grow? • The value of units held in a segregated fund “grows” differently than mutual fund units. • In brief, at the time of allocation for a segregated fund, the number of units stays the same

but the value of each unit increases. At the time of allocation for a mutual fund, the number of units the investor holds increases.

Illustration of Growth in NAV

Type of Fund Number of units on Jan.1

NAV/unit Total value of units

Income earned during year/unit

NAV/unit at year-end

Number of units after flow-through

NAV

Segregated Fund

1000 $10 $10,000 $1.00 $11.00 1000 $11

Mutual Fund 1000 $10 $10,000 $1.00 $11.00 1090 $10

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• Issuers must value their segregated funds at least on a monthly basis, although some funds are valued on a daily or weekly basis. Remember that the holder owns a contract to which fund units are credited; he or she does not actually hold assets in the fund.

• If the fund is established with $200,000 in securities, and the insurer decides that the initial

value of each unit will be $20, then 10,000 units are created and held by the fund.

• If the fund increases in value to 250,000 through interest and capital appreciation of the securities, the value of those units will increase to $25 ($250,000 ÷10,000 units).

• Valuing the fund and dividing that value by the number of units therefore determines the

value of a unit fund. However, before this calculation is made, management fees are deducted. So, if the management fees in the above example are $2,000, the value of the units is:

$250,000 – $2,000 = $24.80 10,000

• If the investor has a plan that contains 10 units, the value of his or her IVIC is: 10 x $24.80 = $248

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Chapter 6 Sales Charges and Investment Decisions

Sales Charges and Investment Decisions • Front-end sales charges are deducted from gross premiums and, therefore, reduce the amount

of investment capital that goes into the segregated fund. This option might best suit the long-term investor whose expectations are to remain a plan holder over the long-term and look to the fund to produce steady growth over a number of years. Payment of the fees up-front means that he or she will avoid paying substantially higher surrender fees based on a percentage of the fair market value of the units in the fund that are surrendered if a back-end load was applied.

• Plans sold with “no-load” fees levy annual fees on the total value of the fund. Thus, annual fees are not only charged over the term in which the investor holds the contract but will increase proportionately with the long-term growth in the fund.

• Younger investors are better choosing the 75% guarantee with correspondingly lower fees and using the reset feature combined with market growth to exceed the 75% guarantee.

N.B. Long-term investors should consider the front-end load, while short-term investors might consider opting for no-load or back-end loads.

What are the Fees and Sales Charges? • There are two cost components in an IVIC. One consists of the fees and charges for the

management and administration of the underlying mutual fund. The other cost component consists of insurance charges for the maturity and death guarantees.

• Fees for a segregated fund and a mutual fund cover similar expenses including:

o legal, audit, registration, and banking charges o administration, record-keeping, and accounting fees

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o costs of printing statements and disclosure documents, filing documents with regulators, and mailing statements to clients

o taxes

• Sales charges are either applied:

o as a front-end load at the beginning of the fund contract o at the end of the contract as a back-end load o on a deferred basis

• If a client pays a front-end load, when he or she withdraws or redeems all or part of the investment, there are no additional sales charges.

• If there is a back-end load, there will be sales charges applied against all withdrawals and

redemptions. The back-end load is paid when the contract terminates or is surrendered.

• The deferred sales charge (DSC) is the most popular choice by investors. The investor agrees to pay a sales charge if he or she redeems all or part of the original investment during an agreed-upon number of years. The sales charge declines over this period until, at the end, the charge is eliminated.

• For example, if a deferred sales charge is set at 5%, the schedule for all or partial redemption

might be:

Year Sales Charge

1 5%

2 4.5%

3 4%

4 3%

5 1.5%

6 0

• If the annuitant dies before the deferred sales charge has been eliminated, the charge will be applied on the value of the contract at the time of death. If the value is greater than the initial investment, a sales charge will be made on the amount of growth in the contract — the difference between the principal amount (the initial investment) and the market value at death. This charge can reduce the amount the beneficiary will receive.

• A no-load fund has no sales charge; it often compensates for the absence of a sales charge by

charging a higher management expense fee.

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• Management expense fees are higher for segregated funds than for mutual funds to cover the cost of the maturity guarantee and death benefits. Accordingly, the management fee for a contract with a 100% principal guarantee on average is .56% higher than a contract with a 75% guarantee.

• The cost of the guarantees in a seg fund makes the management expense approximately .40 to .80% higher than a comparative mutual fund.

• The management expense of a seg fund can be changed with 90 days’ notice.

• Sales charges are reported as a capital loss when the contract is surrendered or matures.

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Chapter 7 Taxation of Segregated Funds

Taxation of Segregated Funds • As already discussed, the favourable tax treatment and time-weighting factor of segregated

funds are important distinguishing features of this investment product.

• The favourable tax treatment is due to the position of the Income Tax Act in respect to IVICs, in which the IVIC is considered to be an inter vivos trust. Income is not retained in the trust; it is allocated to contract holders because inter vivos trusts are taxed at the highest personal tax rate. In addition, inter vivos trusts cannot benefit from personal tax credits.

• You need to be aware of tax issues that arise:

o annually o on the maturity guarantee o for death benefits

Annual Taxation Issues • When deposits are made to the segregated fund, they grow, stay the same, or decrease in

value. • Growth comes in the form of income, Canadian dividends, foreign income, or capital gains. • Growth is distributed to each contract holder in a process called allocation. This involves

allocating, or assigning, a percentage of the fund’s total growth to each unit. As we saw earlier in the discussion of time-weighting, most funds allocate the growth to each contract holder based on the number of units held, and the proportion of the year the units were held. For example, the contract holder who bought units in November would receive a much lower allocation than a contract holder who bought units in January of the same year.

• The annual allocation is made on December 31. The contract holder must declare the allocation as income on his or her tax return. It is taxed in the year it is received unless the contract is registered (as an RRSP, for instance).

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• The allocation of income is reported to non-registered contract holders on their T-3 slips. • When Canadian dividends are allocated, the dividend tax credit is allocated as well. • For tax purposes, dividends are "grossed up" by 45% to determine the taxable dividend

income from which federal tax payable can be calculated. A dividend tax credit of 19% of the grossed-up dividend income is allowed and is calculated from the federal tax payable.

Taxation of Dividends Taxation of Interest

George Hammy invested in a Canada Savings Bond from which he received $765 in interest. George is in the 35% marginal tax bracket (federal and provincial taxes combined). He must pay: $765 x 35% = $267.75 in tax.

George keeps $497.25 ($765 -$267.75).

Taxation of Capital Gains

If George’s investment in a stock did not pay dividends he might decide to sell his shares. If the price of the shares has increased since he bought them and he earns $765 more than he paid, he will have to pay capital gains tax on 50% of the increase.

$765 x 50% = $382.50

George will pay tax on the taxable portion of the gain at his marginal tax rate of 35%. His tax liability will be:

$382.50 x 35% = $133.88 in taxes

George will keep $631.12 ($765 - $133.88).

Taxation of Dividends

To determine the taxable dividend income from which federal tax payable for a public corporation in Canada that is subject to the general corporate income tax rate:

If George received $765 as dividends from the Canadian corporation, he would include $1,109.25 in income for tax purposes ($765 + 45% = $1,109.25) The $344.25 ($1,109.25 - $765 = $344.25) is called the gross up.

$1,109.25 is the taxable dividend income

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Total federal tax payable is calculated as the taxable dividend income multiplied by George’s federal tax rate (note: not marginal tax rate). If the investor's federal tax rate is 26%:

$1,109.25 x 26% = $288.41 in total federal tax payable

The dividend tax credit is 19% of the grossed up dividend income (not of the total federal tax payable) or 27.55% of the actual dividend received.

$1,109.25 x 19% = $210.76 is the dividend tax credit

The federal tax payable is the total federal tax payable less the dividend tax credit:

$288.41 - $210.76 = $77.65 is the federal tax payable

on the dividend received

Provincial tax must then be calculated. There is also a provincial dividend tax credit and a provincial tax rate to be applied; both of which vary by province. Let us assume that in the province where the investor lives the provincial tax payable nets out at 8.5% of the taxable dividend income (after the provincial dividend tax credit and any provincial investment surtax).

$765 x 8.5% = $65.03 in provincial tax payable

Total tax payable is net federal tax payable plus provincial tax payable.

$77.65 + $65.03 = $142.68

George keeps $765 - $142.68 = $622.32

• A benefit of segregated funds, as we have seen, is that both gains and losses on the portfolio of the fund are passed on to contract holders. This means, if there is a net capital gain on the portfolio, it is passed on the contract holders (for tax purposes) and the same applies to net capital losses. Net losses that are passed on to the contract holders can therefore be deducted from capital gains on the same or other investments that the holder has, in the same way as any other capital loss (for tax purposes). Net capital losses on the portfolio of mutual funds are not passed on to the mutual fund unit holders; therefore, they cannot deduct capital losses from the fund’s portfolio from other capital gains that the unit holder may have earned elsewhere.

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• For example: If Newco shares had been purchased at $2.50/share and had decreased in value

to $1.50/share, and had then been sold by the fund at that price ($1.50/share), $1.00/share would be the capital loss. The segregated fund contract holder can deduct the loss ($1.00/share) from other capital gains that have been earned that year. The loss also can be carried back three years or forward indefinitely. Fifty percent (50%) of the net capital gain (net of losses) is taxed at the contract holder’s marginal tax rate.

• Sales charges can be claimed as a capital loss when the contract is surrendered or matures.

• Switching between funds in the same fund family is considered a taxable event and will trigger a capital gain or capital loss in the year the switch occurs.

• If money has been borrowed to invest in the segregated fund, the interest cost of borrowing is a deductible expense for tax purposes, as long as the contract is not held within anRRSP.

Maturity Guarantee Tax Issues • There are different views in the industry on how the benefit of the maturity guarantee should

be taxed. Some consider these proceeds (that is, the amount paid as the guarantee) as capital gains; others consider them to be income.

• The amount of tax that will be paid depends on whether the proceeds are greater than the adjusted cost base of the contract.

• Determining the adjusted cost base of a contract is not exclusive to segregated funds; all life policies have this requirement. The adjusted cost base of a segregated fund is:

o Deposits o + (plus) any income, capital gains allocated to the contract o (minus) capital losses

• When the proceeds are greater than the cost of the contract, capital gains tax is payable on the difference between the cost and the proceeds.

• For example: a $100,000 contract that on maturity is worth $125,000 would attract capital gains tax on $25,000 and capital gains tax would be applied at the investor’s marginal tax rate to $12,500 because 50% of capital gains is taxed.

• When proceeds are less than the cost of the contract, capital gains tax is payable on the guarantee amount, but it is reduced by the capital loss on the investment.

• For example, a $10,000 contract that on maturity is worth $7,500 would require a guarantee payment to the contract holder of $2,500, if the guarantee is 100%. The maturity guarantee of $2,500 is taxed as a capital gain, but it is reduced to zero by the $2,500 capital loss incurred by the investor.

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• If the guarantee is considered to be income, the contract holder pays tax on the full amount of the guarantee and can deduct 50% of the capital loss.

Death Benefit Tax Issues • The death benefit is also treated differently among insurers. Sometimes it is not taxed or it

can be treated as:

o a capital gain o income

• It is best to check with the company issuing the contract as to their position on taxation of

death benefits so that the correct information can be given to the client.

Taxation of Registered Accounts • When a contract is an RRSP, the contract owner must pay income tax on the amount

withdrawn in the year the withdrawal is made.

• An RRSP must be terminated before the end of the year in which the contract holder turns 71, even if the contract has not reached maturity

• If the segregated fund contract is terminated and fully redeemed in that year, the contract holder will have to pay tax on the full amount of the withdrawal. To defer this tax liability, the RRSP can be converted to a Registered Retirement Income Fund (RRIF) or an annuity.

• Tax does not have to be paid on a registered plan when switches between funds are made.

Taxation of Non-Registered Contracts • Insurers provide annual reports to contract holders that detail amounts credited to the contract

and taxable realized capital gains or losses in the fund. A contract holder must declare plan allocations as income in the year that they are received unless the contract is registered in an RRSP.

• Although the contract holder is required to report these amounts for taxation purposes (notwithstanding that the holder receives no actual cash), he or she may claim any tax dividend credits. It is important to note that any capital losses in the contract may also be used to offset capital gains incurred in other investments over the past three years or at any time in the future.

• When a non-registered contract is disposed of, the amount of taxable income reported for taxation purposes will depend on whether the proceeds are taken as a lump sum or as an annuity.

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Chapter 8 The Regulation of Segregated Funds

The Regulation of Segregated Funds • Segregated funds are carefully regulated by the insurance industry. Regulation provides

security; security provides peace of mind to investors.

• In each province, provincial insurance regulators are responsible for supervising the insurance industry. These regulators must approve a segregated fund before it can be sold to members of the public.

• To obtain approval to issue a segregated fund, an application including the proposed contract, application form, information folder, and summary fact sheet must be provided to the Canadian Life and Health Insurance Association (CLHIA), a self-regulatory organization. On approval by the CLHIA, provincial regulators are informed.

• The CLHIA also sets compliance requirements for the funds. Reports on compliance are reviewed to ensure that the fund’s investment objectives, risks, and restrictions meet CLHIA guidelines.

• Another federal body, the Office of the Superintendent of Financial Institutions (OFSI) is responsible for ensuring the solvency of insurance companies. They require that an insurer have at least $10 million in capital when it is incorporated. In fact, the average for companies issuing segregated funds is over $600 million in capital.

• Credit ratings of insurers provide further peace of mind to investors. Although credit ratings do not have to be disclosed to prospective contract holders, this information is published in Canada and is available in print or online. Two of the better-known credit rating firms are Canadian Bond Rating Service (CBRS) and Dominion Bond Rating Service (DBRS). Ratings are often also available from the insurers themselves.

• Insurers must report annually on assets and liabilities as well as income and expenditures during the year.

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• CLHIA also strictly controls how segregated funds can be presented to the public including all advertising and other forms of communication.

• To be able to issue a segregated fund contract, a company must be legally licensed to sell life insurance and provincially licensed in those provinces in which it wants to sell.

• Further assurance about the solvency of insurers is provided by Assuris. Assuris is an industry-sponsored, non-profit, federally incorporated consumer protection plan for contract holders.

• The federal government requires life insurers to be members of Assuris.

• If a member of Assuris should be unable to meet its obligations to segregated fund contract holders, Assuris will provide up to 100% coverage to $60,000 and 85% coverage on funds above $60,000 per customer per institution in compensation.

• Thus an account worth $50,000 at the time of insurer dissolution would receive 100%

coverage and $50,000 would be paid to the contract holder. An account worth $100,000 would entitle the account holder to receive $60,000 + ($40,000 x 85%) = $60,000 + $34,000 = $94,000.

Money Laundering and IVICS • When premium payments over the life of the contract are greater than $10,000, the insurer is

obliged to retain the application form by the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.

• The insurer must also verify the identity of the client by photo ID−driver’s license, passport, etc.

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Chapter 9 Which Clients Best Suit Seg Funds?

Which Clients Best Suit Seg Funds? • Who makes the best candidates for this type of investment?

• Some of the characteristics you might look for include:

o the risk averse o age factors o those with sufficient financial resources, or who are financially secure o entrepreneurs, small business owners, corporate directors, and professionals o investors over 55 needing estate preservation benefits o investors in poor health

Risk Averse • People of any age can be afraid of taking risks. However, it has also been shown that as

people age they become more conservative and are less likely to take on risks that they might have accepted when they were younger. In other words, they become more risk averse.

• The guarantees offered by segregated funds make them a good choice for the risk averse, especially when one of the low-risk funds (such as a mortgage fund) are selected.

Age Factors • Some clients are excluded outright from segregated fund contracts by virtue of their age.

Minors, for instance, are prevented from entering into any type of enforceable contract. On the other end of the spectrum, some insurers require that a person be less than 80 years of age when issued a segregated fund contract.

• Contracts that are held in an RRSP or locked-in retirement account must be terminated no later than the end of the year in which the contract holder turns 71. Contracts held in RRIFs

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(Registered Retirement Income Funds) or LIFs (Life Income Funds) must be terminated by age 90.

• Some insurers set the termination date for non-registered contracts to be the end of the year in which the annuitant turns 100.

Clients Who Are Financially Secure • Segregated fund investment pays off when the investment matures for the full 10-year period.

It is not intended for use as an emergency fund or for short-term savings or gains. For this reason, segregated funds are suited to clients who can “park” their money for 10 years and will not need this money for short-term requirements.

Entrepreneurs, Small Business Owners, Corporate Dir ectors and Professionals

• These people all face potential personal liability for debts. Because seg funds are creditor protected, they are a wise investment for these individuals.

• However, recall that restrictions in regards to bankruptcy, or other forms of debt avoidance apply.

Investors Over 55 Needing Estate Preservation Benef its • Seg funds provide the beneficiary with a guaranteed amount of benefit without going through

probate. This effectively increases the value of the investment because it means the beneficiary will receive 100% of the funds, and much sooner than if the funds were probatable.

• This benefit is available regardless of the length of time the investor has owned the contract or how the markets are performing.

Investors in Poor Health • There is no requirement to prove evidence of good health when an investor acquires an IVIC.

Therefore, if an investor is in poor health and concerned that market volatility will affect an investment during the maturity period, an IVIC will ensure that his or her beneficiary receives a guaranteed amount.