Segregated Funds in Canada: What They Are & Why They Matter
Published on June 18, 2025 | By WealthFusions Finance Team
Segregated Funds: Key Features & Benefits
| Feature | Description |
|---|---|
| What Are Segregated Funds? | Investment funds offered by insurance companies combining mutual fund growth potential with insurance guarantees. |
| Guarantees | Typically 75% to 100% capital protection at maturity or death, ensuring minimum payout. |
| Investment Options | Wide range of portfolios including equity, bond, balanced, and specialty funds. |
| Creditor Protection | May protect assets from creditors, useful for business owners and professionals. |
| Beneficiary Designation | Allows direct beneficiary naming, bypassing probate and ensuring faster inheritance transfer. |
| Fees | Generally higher than mutual funds due to insurance guarantees and management fees. |
| Liquidity | Offers reasonable liquidity but may have redemption fees or restrictions depending on contract terms. |
| Tax Treatment | Growth is tax-sheltered inside the fund; gains taxed upon withdrawal based on individual’s marginal rate. |
| Ideal For | Investors seeking market exposure with capital protection and estate planning benefits. |
| Risks | Investment returns are not guaranteed; fees can reduce overall returns. |
Ever heard of investment products that combine growth potential with insurance protection? That’s exactly what segregated funds (commonly known as seg funds) offer. Popular among Canadian investors seeking capital guarantees, estate planning advantages, and creditor protection, seg funds are unique, insurance-based investments that differ from mutual funds. This guide breaks down how they work, their pros and cons, costs, real-world comparisons, and who they’re best suited for in 2025.
1. What Are Segregated Funds?
Segregated funds are insurance contracts offered by life insurance companies. They pool investor money and invest in a diversified portfolio (like mutual funds), but come with insurance guarantees on maturity or death.
Key Features:
- Maturity guarantee: 75% to 100% of your invested capital guaranteed at contract maturity (typically 10 years).
- Death benefit guarantee: 75% to 100% paid to your beneficiary regardless of market loss.
- Creditor protection: Assets may be shielded from lawsuits or bankruptcy in certain cases.
- Bypass probate: Funds are paid directly to beneficiaries, reducing delays and legal fees.
2. Seg Funds vs. Mutual Funds: Key Differences
| Feature | Segregated Fund | Mutual Fund |
|---|---|---|
| Capital Guarantee | 75–100% at maturity or death | No guarantee |
| Creditor Protection | Yes (if beneficiary named) | No |
| Probate Bypass | Yes | No |
| Fees (MER) | ~2.5%–3.5% | ~1.5%–2.5% |
| Lock-in Period | 10 years typical | None |
| Offered By | Insurance Companies | Investment Firms & Banks |
Segregated Funds vs Mutual Funds
| Feature | Segregated Funds | Mutual Funds |
|---|---|---|
| Provider | Insurance Companies | Investment Management Companies |
| Capital Protection | 75%-100% Guaranteed at Maturity or Death | No Guarantees – Market Value Only |
| Fees | Higher – Due to Insurance Guarantees | Lower Management Fees |
| Creditor Protection | Possible, especially for businesses | None |
| Beneficiary Designation | Direct Beneficiary Naming, Avoids Probate | No Direct Beneficiary, Subject to Estate |
| Liquidity | Moderate, may have redemption fees/restrictions | High – Generally Daily Redemptions |
| Tax Treatment | Taxed on withdrawal gains | Taxed on distributions and gains |
| Ideal For | Conservative investors wanting guarantees & estate planning | Investors prioritizing cost-efficiency & flexibility |
3. Benefits of Segregated Funds
- Estate Planning: Bypass probate, avoid delays, and ensure faster transfer to your loved ones.
- Creditor Protection: Great for self-employed professionals or business owners who want asset security.
- Market Downside Protection: Peace of mind knowing your capital is protected at maturity or death.
- Reset Features: Some contracts allow you to lock in growth and raise the guarantee floor over time.
Example: Jane invests $100,000 in a 100% maturity guarantee seg fund. Even if the market drops 30% by maturity, she receives the full $100,000 back after 10 years.
4. Risks & Disadvantages
- Higher Fees: MERs are 0.5%–1% higher than mutual funds to cover insurance components.
- Limited Liquidity: Withdrawing early may reduce guarantees or cause fees.
- Complex Structure: May be hard for beginners to fully understand features and conditions.
Tip: Choose seg funds when the insurance benefits (like creditor or probate protection) justify the added cost.
Segregated Funds: Key Features Flowchart
Insurance + Investment
75%-100% Guaranteed at Maturity/Death
Equity, Bonds, Balanced, Specialty
Asset Protection for Business Owners
Bypass Probate, Faster Inheritance
Due to Guarantees and Insurance
Taxed on Withdrawal Gains
Conservative Investors Seeking Growth + Protection + Estate Planning
5. Who Should Consider Seg Funds?
- Self-employed professionals or business owners seeking creditor protection.
- Retirees or near-retirees who want guarantees on their invested capital.
- High-net-worth individuals looking to simplify estate planning and avoid probate.
Note: Seg funds are available only through licensed life insurance advisors—not regular investment brokers.
6. Seg Fund Providers in Canada (2025)
- Manulife Investments – Popular “GIF Select” product line with reset features.
- Sun Life Financial – Offers estate and retirement-focused segregated fund contracts.
- Canada Life – Freedom Funds offer flexible death benefit and maturity guarantee combinations.
- iA Financial Group – Offers competitive fee structures with automated resets.
7. Cost Comparison: Sample Fee Breakdown
| Product | MER (Management Expense Ratio) | Guarantee | Reset Option |
|---|---|---|---|
| Manulife GIF Select IncomePlus | 3.10% | 100% at death & maturity | Yes, annual |
| Sun Life Granite Balanced Seg Fund | 2.80% | 75% maturity, 100% death | No |
| iA Ecoflextra | 2.60% | 75% maturity, 75% death | Yes, triennial |
8. Tax Treatment of Seg Funds
Seg funds are held inside an insurance contract and taxed similarly to mutual funds:
- Non-registered: Taxable capital gains, dividends, and interest apply.
- Registered: No tax until withdrawal (RRSP, RRIF, TFSA, etc.).
However, seg funds allow for tax-free rollovers to named beneficiaries, saving time and money in estate planning.
Conclusion & Next Steps
Segregated funds are a compelling option for Canadians who want the growth potential of investments with the protection of insurance. They’re especially beneficial for business owners, retirees, and estate planners—but not ideal for short-term investors or those on a tight fee budget.
Ready to explore if seg funds are right for you? Book a free session with a licensed advisor today and build your personalized investment strategy.
Frequently Asked Questions
- 1. Are seg funds guaranteed?
- Yes, 75–100% of capital is guaranteed at contract maturity or upon death, depending on the plan.
- 2. Can I lose money in seg funds?
- If you withdraw early or before maturity, you may receive less than the guaranteed amount.
- 3. How long do I need to hold a seg fund?
- Most require a 10-year holding period to activate the maturity guarantee.
- 4. Are seg funds good for retirement?
- Yes, especially for retirees wanting protection of capital and smooth wealth transfer to beneficiaries.
- 5. Who sells segregated funds?
- Only licensed insurance advisors can sell seg funds—not investment-only brokers.
- 6. Are seg funds TFSA or RRSP eligible?
- Yes, you can hold seg funds inside registered accounts like RRSPs and TFSAs.
- 7. What happens if the insurer fails?
- Seg funds are protected under Assuris up to $100,000 per product category.
- 8. Do seg funds have reset features?
- Some contracts allow locking in gains periodically to raise your guaranteed amount.