Segragated Funds

Question 1

Who invented segregated funds?

Answer 1

Segregated funds are offered by life and health insurance companies
Only

Question 2

What is a segregated fund?

Answer 2

Monies invested in the fund, pulled and kept separate from the insurer other assets, and cannot be used for any other purpose than the benefit of segregated funds contract holders (not owners). A segregated fund is an individual variable insurance contract. IVIC

Question 3

What is IVIC?

Answer 3

Individual variable insurance contract

In other words segregated fund

Which is only offered by insurance companies

Question 4

Who offers IVIC?

Answer 4

Only insurance companies may offer an IVIC aka seg fund

Question 5

Explain individual variable insurance contract (IVIC) and segregated funds (using word definitions) aka dummy explanation

Answer 5

A segregated fund is for an individual, not a group

It is a contract between the investor (insured) and the insurer

There is a lot of flexibility available, hence variable

Segregated funds are called as such because the assets held by the insurer are separated, a.k.a. segregated from the other assets

Question 6

What are the fees of segregated funds?

Answer 6

Segregated funds have management fees. the management fees of segregated funds are higher than those of comparable, mutual funds, as they offer additional features and guarantees!

Question 7

Why are there higher management fees on segregated funds compared to comparable mutual funds?

Answer 7

They offer additional features and guarantees

The distinct features are: exemption from seizure, guarantee at death, or at maturity of the contract, and reset option.

Question 8

Why are segregated funds so awesome?

Answer 8

Because they offer 75% guarantee at death or at maturity minimum.

Question 9

What does exemption from seizure mean?

Answer 9

The exemption of segregated funds from seizure is possible, because they are insurance products and not securities and an appropriate beneficiary was designated

Question 10

When are segregated funds, exempt of probate fees?

Answer 10

Since the segregated fund has a beneficiary, it can be exempt from probate fees, as long as the beneficiary is preferred, or irrevocable, and named in good faith.

Question 11

What is probate anyway?

Answer 11

Probate is the process by which the will will is deemed valid. It may be subject to fees. Probate fees are taxes on each asset that is named in the will.

Question 12

What kind of contract is segregated funds and who are the parties?

Answer 12

Individual variable insurance contract

Contract between an investor (client) and insurer

Question 13

What is the risk of a segregated fund?

Answer 13

Very low to high, depending on the securities in the portfolio

The risk depends on the risk tolerance and capacity of the investor

However, the segregated fund does guarantee upon maturity or death, which protects at least 75% of the capital invested over a 10 year Period

Question 14

How liquid is a segregated fund?

Answer 14

Very liquid, normally redeemable at any time

Question 15

What’s an investment that is not very liquid

Answer 15

Real estate for example, because it takes a long time to sell, you might have to move. If you live there, the market may be down and you might have to wait longer to sell. Real estate is considered a higher risk investment due to its lack of liquidity as well as it’s longer term investment

Question 16

What kind of returns can you expect from segregated funds?

Answer 16

Interest income,
and/or
dividend income
and/or
capital gain or loss, depending on the securities in the portfolio

Question 17

What does guarantee at death mean and how much is it?

Answer 17

The guarantee of death provided by a segregated fund may vary between 75% and 100%

Question 18

What is guarantee at maturity?

Answer 18

The guarantee provided by a segregated fund must be at least 75% of the invested capital at maturity of the contract and at death it can be 100% with higher management fees.

This maturity date must be at least 10 years after the contract is taken out.

The reimbursement guarantee of the contract is only valid at majority.

Question 19

Does the segregated fund have a reimbursement guarantee? How do you get it and when is it valid?

Answer 19

That guarantee of reimbursement occurs when this segregated fund comes to maturity. You get it if your segregated fund has a maturity guarantee that’s what reimbursement guarantee means.

Example

Damien purchased a $10,000 segregated fund on February 8, 2000. the contract maturity is 10 years with a 75% guarantee. on June 12, 2008 Damien requested full redemption of his segregated fund, which was then worth $6800. He received $6800 and $7500 (75% of $10,000) as he did not wait for the 10 year maturity period Of the contract.

Question 20

What does renewal or reset mean?

Answer 20

Several insurer offer the possibility to renew the guarantee. Renewal is similar to update or reset of the segregated fund market value, following an attractive increase of the fund value since the contract was taken.

Example
Diane invested $15,000 in a segregated fund on June 12, 2008. The funds guarantee is 75% of the amount invested and the maturity is 20 years. On April 16, 2012, the segregated fund is worth $18,755 and she decides to restart her guarantee. The new maturity date of the contract is April 16, 2032 and the amount guaranteed is now based on $18,755.

Question 21

When is the minimum maturity date for renewal?

Answer 21

The maturity date must be at least 10 years after the renewal

Question 22

What is the minimum amount of years for segregated fund maturity for a 75% guarantee at maturity?

Answer 22

Minimum 10 years from taking out the contract to maturity

Question 23

For segregated funds, when is the guarantee immaturity not guaranteed?

Answer 23

It is not guaranteed if the reimbursement is taken out before the 10 year maturity period of the contract.

If you request full redemption of the segregated fun before the 10 year maturity period, The reimbursement matches market value.

Question 24

What is the sentence used to remember level of risk (volatility) from lowest to highest for segregated funds?

Answer 24

MY - money market securities funds (fixed value)
MORTGAGE - mortgage funds (5 year term)
BROKER - bonds funds
BROKE - balanced funds (most diversified)
DOWN - dividend funds
EVERY - equity funds (index-linked, small-cap equity funds, mid cap, large cap)
RATE - real estate funds
SUCCESSFULLY - specialized funds

Question 25

What type of funds can you have in a segregated fund account?

Answer 25

My mortgage broker broke down every rate successfully

Money market funds
Mortgage funds
Bond funds
Balanced funds
Dividend funds
Equity index funds
Large cap equity funds
Mid cap equity funds
Small cap equity funds
Real estate ?
Specialized funds

Question 26

What are money market funds?

Answer 26

This is a type of fund in a segregated fund

Money market funds also called money market securities funds are made up mostly of treasury bills, bankers acceptance, commercial papers, and short term government bonds (less than one year )

Question 27

What are mortgage funds?

Answer 27

Mortgage funds are a type of fund in a segregated fund

Mortgage funds are made up of first ranking mortgages on first ranking residential buildings. The risk is lower than that of a bond funds as the term of a mortgage is often shorter than that of marketable bonds.

A small portion of the mortgage funds may be invested in mortgages related to commercial properties.

Question 28

What are bond funds?

Answer 28

Bond funds are made up of mid to long-term bond debt securities

Corporate debentures and stripped coupons are also available in bond funds, but to a lesser extent.

In bond funds, maximizing, capital gain, and minimizing capital loss as interest rates change is the key to achieving the best possible return. the market value of marketable bonds move in the opposite direction of interest rate fluctuations.

Question 29

What are balanced funds?

Answer 29

Balance funds are type of fund in a segregated fund

Balance funds are made up of both fixed income securities, a.k.a. bonds , and variable income securities a.k.a. shares. We frequently hear about half-and-half, referring to fix the content and variable income content close to 50% in each case.

For relatively short periods of time in general, a balance fund weighting may be more likely to be 40% fixed income and 60% variable income or vice versa

Question 30

What are dividend funds?

Answer 30

Dividend funds are a type of fund in segregated funds

Dividend funds are made up of preferred and common shares which pay dividends. Portfolio growth is a secondary goal compared to the regularity of dividend payments.

Question 31

What are equity index funds?

Answer 31

Equity index funds are a type of fund in segregated funds.

Equity index funds reproduce a market index, and are made up of large corporations, common shares, which pay dividends; but the payment of dividends is not mandatory.

 they do not benefit from professional management, but have lower management fees. The primary objective is portfolio growth, and the regularity of dividend payments is a secondary objective.

Question 32

What are large gap equity funds?

Answer 32

Large equity funds are made up of common shares of large capitalization companies, which pay dividends, but the payment of dividends is not mandatory.

The return potential is slightly higher than that an index equity fund

Question 33

What are mid cap equity funds?

Answer 33

They are made up of common shares of mid capitalization companies, which pay dividends, but the payment of dividends is not mandatory

Question 34

What are small cap equity funds?

Answer 34

They are made up of common shares of small capitalization companies, which pay dividends, but the payment of dividends is not mandatory

Question 35

What are specialized funds?

Answer 35

They are the highest risk and highest expected return type of funds in segregated funds

Specialized funds are made up exclusively of securities in a single sector. They may invest, among others, in high technology, natural resources, healthcare, or even income trusts.

Question 36

Do segregated funds have fees? Which fees come when?

Answer 36

Front end fees
Paid when purchasing segregated funds. Also called subscription or purchase or front load fees, and represent a percentage of the amount invested.

Example
If an investment has 2% front-end fees , that means only 98% of the investment is actually invested

Back-end load fees
Aka retrocession fees
Paid when redeeming segregated funds. They are also also called retrocession fees, and represent a percentage of the amount invested.

Example
An investor invest $5000 in a dividend segregated fund without front-end fees and with decreasing retrocession fees on the market value over six years decreasing at a rate of one percent per per year. The segregated fund has a market value of $6000 in the fourth year whereas backend fees are 3% of the market value (180$).

Side note, there are also
Transfer fees
Management fees

Question 37

What are transfer fees?

Answer 37

Transfer fees occur when switching a segregated fund for another segregated fund of the same family

Question 38

How do you charge management fees on a segregated fund?

Answer 38

Management fees are based on a percentage of the acid under management

This covers work done on segregated funds by management teams as well as various administration fees