Seggregated fund guarantees

In my last post I touched on the difference between seg funds and mutual funds. Now I want to touch on what guarantees are available within seg funds.

Seg funds all have a minimum guarantee, but these guarantees vary by company. The following is a brief outline of what I would consider to be the basic guarantee (some companies may provide better).

When you invest in a seg fund you will select a maturity date. This is generally age 71 (the age the government requires you convert your RRSP to a RRIF). The base assumption would be that the guarantees kick in at that time.

At maturity, all deposits that were made 10 or more years ago are 100% guaranteed. Any deposits made in the last 10 years would be 75% guaranteed.

Let’s say you’ve been investing for 20 years. In the first 10 years you invested $100,000. In the last 10 years you invested another $100,000. If your investments have crashed to the point where you actually have less than that initial $200,000, the guarantees will kick in - the insurance company will actually top up your investment. So the first $100,000 will be topped up completely, and the second $100,000 will be topped up to a maximum of $75,000. So worst case scenario at the maturity date would be a guarantee of $175,000.

The same guarantee is available at death.

A few more points. First, this is only a general idea of how the guarantees work for seg funds. All the companies have their own base guarantees, similiar to but different from the above. There are also additional complications like ‘resets’ from some companies that allow you to lock in your growth (basically saying that as of today, all your growth is treated as a new deposit, thus in 10 years the minimum guarantee would apply to your funds’ current amount).

Mutual funds do not offer this guarantee. As I noted previously, seg funds commonly have slightly higher fees. You’ll need to review the difference in fees with the guarantees to see if seg funds are right for you.