Lambe & Associates, Inc.

Segregated Funds and the Death Benefit Guarantee

As a financial planning tool, segregated funds (or seg funds for short) offer several benefits within the area of estate planning. In fact, seg funds combine all the best features of a mutual fund with the attributes of an insurance policy. One of those insurance attributes, and a very important one, is the death benefit guarantee, which ensures that a specific percentage of the value of your investment pays directly to your beneficiaries at the time of your death. This death benefit payment may even bypass probate altogether, streamlining the estate settlement process and making it easier for you to pass your investment assets on to those you love. Seg funds must provide at least a 75% death benefit guarantee, but the guarantee can be up to 100%.  

The death benefit guarantee also adds an integral level of security that is not available within a mutual fund - this can be increasingly useful if you are in or approaching your retirement. At the same time, a seg fund allows you to invest for potentially higher returns than guaranteed options such as GICs. The death benefit guarantee forms a sort of “safety net” that provides an element of protection against the market risk within these funds.

An additional feature, which involves the death benefit guarantee and highlights the integrity of the seg fund, is the guarantee reset. Some seg fund contracts give you the option to exercise a guarantee reset when the market value of your investment account is higher than your current death benefit guarantee value. By implementing a reset, your death benefit guarantee will increase to match the current market value. Definitely a bonus, but keep in mind that guarantee resets are usually limited to one or two per calendar year.

Here are two examples to illustrate the value of a death benefit guarantee:

Example 1: You open a seg fund contract with an initial deposit of $100,000 and the contract includes a 100% death benefit guarantee. However, a market correction has caused the value of your investment to drop and the value is now $92,000. Because your contract maintains a 100% death benefit guarantee, upon passing, your insurance company would apply a “top up” to your account and your beneficiary would receive the full $100,000 death benefit payment – the full value of your initial investment.

Example 2: You open a seg fund contract with an initial deposit of $100,000 and the contract includes a 100% death benefit guarantee. The market value of the investment increases to $108,000 over the following six months so you opt for a guarantee reset. This will increase the death benefit guarantee value to $108,000. However, at the time of your passing the market value of your investment decreases to $103,000. Regardless of the market, your beneficiary will receive the greater of the current market value with the death benefit guarantee – the full payment of $108,000.

Death Benefits Guarantee 2

Having said all this, it’s still important to note that certain transactions in a seg fund policy affect the death benefit guarantee. For example, additional deposits to a policy increase the death benefit guarantee, while redemptions from a policy reduce the guarantee - often proportionately. However, when you pass, your beneficiary will receive the greater of the guarantee value or the current market value. A big relief indeed.

When considering estate planning, it’s prudent to consider seg funds and the death benefit guarantee as a valuable and viable option. Definitely a conversation worth having when you consider how to invest for your retirement.