Secure Growth in Volatile Markets: The Power of Segregated Funds with a Death Benefit Reset
In times of market volatility, it’s natural to worry about your wealth. Segregated funds offer a way to grow investments while preserving peace of mind. These insurance-backed vehicles combine the potential of mutual funds with protections designed to safeguard outcomes, especially for retirement and legacy planning.
What Are Segregated Funds?
Segregated funds, often called “seg funds,” operate under insurance contracts rather than typical mutual fund structures. You invest in a pool of assets—stocks, bonds, or multi-asset portfolios—similar to mutual funds. But there’s a difference: your principal, and sometimes gains, are guaranteed. These guarantees can apply at maturity or on death, and often range from 75% to 100% of your deposit.
They’re structured to include a maturity date, typically after 10–15 years, and a death benefit guarantee, ensuring beneficiaries receive no less than the guaranteed amount. These features come with extra fees to underwrite the insurance protection.
Three Core Advantages
Guaranteed principal: If the fund falls in value, you’re still assured a return at least equal to your guaranteed level—typically 75% to 100%—provided you meet holding requirements.
Death benefit protection: Named beneficiaries receive the greater of current market value or the guaranteed amount, often bypassing probate and reducing fees.
Creditor and estate planning benefits: For business owners or estate planners, segregated funds can offer protection from creditors and facilitate smoother, quicker transfers to heirs.
What Makes the Reset Feature Special
The reset option is where segregated funds lift above mutual funds and GICs. When markets rise, users can “reset” their guarantee to the fund’s current high-water mark. That means future guarantees lock in higher values—and this usually can happen once or twice a year, up to a certain age (often 70 or 80).
For example:
You invest $100,000 with a 100% death-benefit guarantee.
The fund grows to $108,000.
You reset, updating your guarantee to $108,000.
Later, if the fund dips to $103,000, your beneficiary still receives $108,000.
Resetting restarts the maturity schedule. If you reset again, you begin a new holding period for that guarantee.
Why This Works Well in Market Volatility
Lock in gains: You can reserve high-water marks, securing gains as markets climb.
Protect during downturns: Even if values fall, you retain previously locked-in protection via the reset.
Blend growth and safety: Unlike GICs, seg funds provide equity exposure with potential upside while avoiding permanent losses of principal.
Provide certainty for your heirs: The death benefit ensures a stable transfer outcome, unaffected by market fluctuations at death.
Because of These Compelling Benefits, There Are Added Costs
Segregated funds provide strong protections and planning advantages. Because of this, they come with added costs that support those guarantees.
Fees
These costs come in the form of management expense ratios (MERs) and additional charges for features like resets and insurance protection. MERs typically range from 1%–3%, with reset features adding approximately .10–.30%.
That said, investors can choose funds with higher growth potential, which often more than offsets the fees. Many of the funds we select have averaged over 12% annual growth over the last five years. Talk to us to learn whether these options could be a good fit for your plan.
Holding requirements
Guarantees apply only at maturity or death. Early withdrawals before maturity might forfeit guarantees and may incur surrender charges.
Reset limits
There’s often a cap on how many resets allowed per year. You also must be below a maximum age, typically 70 or 80—to use them.
Real-World Illustrations
Scenario A: Guarding capital
Invest $100,000 in a segregated fund with a 100% guarantee.
Markets dip to $92,000.
You pass away.
Beneficiaries receive $100,000—not the reduced market value.
Scenario B: Locking in gains
Fund grows to $108,000.
You reset the guarantee.
Market dips to $103,000.
Beneficiaries receive the locked $108,000.
Tax and Estate Implications
Ownership structure
Contracts distinguish among owner, annuitant and beneficiary. Upon death, proceeds pass directly to beneficiaries, potentially bypassing probate, saving both time and cost.
Tax treatment
In non-registered accounts, income and gains are taxed annually. Unique to seg funds, any losses realized by the fund flow through to the owner, who can use these to offset gains. Also, insurance companies track adjusted cost base, simplifying tax reporting.
These features may reduce estate complexity and enhance tax efficiency, especially in non-registered plans.
Who Should Consider This?
Retirees and near-retirees: Protecting capital and guaranteeing legacies aligns with retirement priorities.
Conservative investors: They want growth but face uncertainty or low tolerance for drawdowns.
Business owners: Creditor protection and estate planning motifs are strong advantages.
Blended families: Clear inheritance paths minimize conflict and court delays.
Young investors might prefer cheaper mutual funds, but for some, the hybrid protection and potential growth of seg funds can still be worthwhile.
Choosing the Right Guarantee Setup
Models typically include:
75/75: 75% maturity guarantee and 75% death benefit
75/100: 75% maturity, 100% death benefit
100/100: Full protection on both maturity and death benefit
Add-ons may include:
Death benefit reset: Renew high-water protection annually
Maturity guarantee reset: Secure high market values for maturity
Sometimes lifetime income riders or other options may be available.
Smart Questions to Ask Your Advisor
What guarantee structure best matches my retirement and estate goals?
How many resets does the policy allow each year? Up to what age?
What are the total fees, including MER, insurance, reset and potential surrender charges?
What is the minimum holding period to keep guarantees?
How does the tax reporting work, especially for gains, losses, and account type?
An advisor can bundle fund selection, guarantee choice and timeline to align with your unique needs.
Final Thoughts
Segregated funds with a resettable death benefit offer a compelling blend of growth potential and protection. In a single investment, you can:
Capture market upsides
Lock in gains through resets
Shield heirs from market downturns
Simplify legacy planning
Potentially secure creditor protection
Segregated funds offer a rare mix of automatic growth and built-in protection. They help you capture gains, guard your profits, and keep your plan on track, no matter what the markets are doing. Especially amid market volatility, these tools are worth exploring.
A thoughtful conversation with your advisor can help determine whether segregated funds align with your financial story.
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