Segregated Funds Provide Flexibility, Growth Potential and Unique Benefits

 

With the financial markets looking more promising, many individuals are reviewing their investments with an eye towards capturing future growth. Diversification, a broad range of investment options and the services of professional money managers for a reasonable fee are all components of a good retirement portfolio. Segregated funds, sometimes called Guaranteed Investment funds offer the above features and more at a very competitive price.

 

A segregated fund contract is issued by a life insurance company. There are numerous investment options inside a segregated fund policy which are managed by many different fund managers in a wide range of investment classes. For example a segregated fund issued by an insurance company would offer investment options such as GIC’s , bond funds, money market funds, balanced or asset allocation funds, dividend funds, Canadian equity funds, International funds and specialty funds such as resources or real estate. Advisors can build a diversified portfolio for their clients using numerous professional fund managers all in one policy contract. Clients can switch between one fund and another within the segregated fund contract at no expense.

 

Segregated funds may also offer income protection from market downturns, maturity guarantees and guaranteed death benefits which can be reset and increased as the portfolio grows at no expense to the client.

 

There are numerous estate planning benefits of segregated funds. The death benefit guarantee insures that your beneficiaries are guaranteed 100% of all deposits made (minus any redemptions) even during a market downturn.

 

The proceeds of a segregated fund at death bypass the estate, estate fees, probate fees and long delays if there is a named beneficiary or beneficiaries. The proceeds of the investment pass privately and directly to your designated beneficiaries without the expense associated with settling an estate.

 

Segregated funds both registered in an RRSP, RRIF or Locked in RRSP fund or Non- registered investments are protected from creditors if the client runs into financial or business difficulties. This opportunity is ideal for professionals, such as doctors, lawyers, accountants, dentists and small business owners looking to help shield their personal assets from professional liability.

 

Additional advantages provided by insurance company segregated funds include strict monitoring and selection of outside fund managers who offer investment portfolios inside the segregated fund. These monitoring processes use stringent criteria to make sure the investment funds available represent the highest quality investment managers.

 

If you are interested in capturing the growth potential of the financial markets, wanting to diversify the risk in your portfolio or repositioning your retirement plan to provide income and security of your capital during market fluctuations, consider the benefits of a segregated fund. Speak to a qualified financial advisor about the opportunities a segregated fund provides for you and your family.

How Grandparents can do more financially to help their Grandchildren

 

Many grandparents are assisting with some of the big expenses and sometimes bypassing adult children to leave inherited assets to grandchildren instead.

Helping grandchildren may start by contributing to their Registered Education Savings Plans.  The maximum contribution is $2,500.00/year.  The government grant matches 20% of the annual $2,500.00 contribution.

Another option is to start contributing annually to a TFSA once your grandchildren are age 18.  If your grandchild is age 18, grandparents could contribute to the FHSA First Home Saving Account and can have contributions up to $40,000.00 with an annual contribution of $8,000.00 per year.  Similar to the TFSA, any gains on the investment grow tax free as long as they are eventually used to buy a qualifying home.  The FHSA will help our grandchildren break into the housing market.

Purchasing life insurance on grandchildren provides them with a financial asset to build upon and a baseline of insurability for the future.  Life insurance cash values grow tax sheltered and many provide another opportunity to create wealth in a tax sheltered and efficient manner and provide your grandchild with a life insurance policy to build upon over time without the need to provide evidence of insurability in the future.

These are just a few of the financial tools available to help our grandchildren achieve future financial stability.

Selling off in a low market is a big mistake for investors!

In times of stock market fluctuation and uncertainty about inflation, rising interest rates and global concerns, it is a reliable reflex for investors to question and want to decrease their exposure to potentially risky assets.

Historically proven, this can be some of the worst mistakes an investor can make.  Selling when market’s are down creates real losses rather than a loss on paper at that given time.  Timing the stock’s markets rally and upward direction is almost impossible.  Many investors never gain back their losses after panic selling.

We should be reminded that stock market corrections are a fact of investing.  Years ago on Black Monday October 19, 1987 the Dow Jones Industrial plunged 23% in a single day and the Toronto Stock exchange was not far behind.  More recently, on February 29, 2020 as a result of the coronavirus the Toronto Stock Exchange dropped to $16, 263.05.  In May 2021, the Toronto Stock Exchange climbed over 20,000.  Warren Buffett contends that “successful investing doesn’t require extraordinary intelligence, but rather extraordinary discipline”.

“The stock market is the story of cycles and of the human behaviour that is responsible for corrections in both directions” – Seth Klarman.

Focus on the long game as market volatility is inevitable and is part of normal and healthy market behaviour.  Just like seasons, stock markets move through states of growth, slowing down and speeding up. The timing of these cycles is unpredictable.  While dramatic moves in the market can make you question your investment plan, it is important to remember not to panic.  When the stock market does dip, the historical facts show that eventually it always comes back even stronger.

If we assume the client’s overall investment plan is sound, diversified and based on their risk tolerance assessment, then the best strategy in times of market fluctuation is to stay course and stay invested.  For those investors who panic sell and liquidate their equity holdings, the consequences can last a lifetime!

 

Giving a child access to a post secondary education is something all parents, grandparents, aunts or uncles hope to be able to do. The cost of post secondary education continues to increase over time. Many students are forced to take out loans to pay for their education after high school. According to Statistics Canada, university tuition fees have risen in excess of 135% in the past 15 years.

A parent, grandparent, or other relative can contribute to a Registered Education Savings Plan up to an annual maximum of $2500.00 per child for a cumulative contribution limit of $50,000.00 per child beneficiary. Contributions can be made to the plan for a maximum of 31 years from the effective date of the plan. The RESP must be liquidated no later than 35 years after it is set up.

In 1998, the Federal Government created the “Canada Education Savings Grant” program. This program provides an extra 20% in addition to the annual contributions paid into the plan by the subscriber up to a maximum of $500.00 per year per beneficiary (child). There is a lifetime maximum grant of $7200.00 per child beneficiary. The provinces also have various incentives to encourage families to save even more by supplementing the Federal Grant Program

The proceeds in the RESP grow tax sheltered and the withdrawal payments are taxable and paid to the child when he/she attends post secondary education which includes many trade schools.  Students’ incomes are generally modest, the amount of income tax paid on withdrawals from an RESP are relatively low. Proceeds from a RESP can be used to pay tuition, housing, food, school supplies, transportation etc. while attending post secondary school.

If the child decides not to attend a post secondary institution, the money is not lost because it can be transferred to the Subscribers RRSP if there is room.  In this instance, the grant money must be returned to the Government, however, the growth and contributions to the RESP can be rolled over to the RRSP of the subscribers, often the parents.

Education is an advantage that counts and is also an excellent investment as more than ever employers seek qualified, highly trained candidates with specialized skills. Two thirds of jobs require a post secondary education. With prudent investing and time the long term rate of growth is in excess of 20% with the grants added, RESP’s make a tremendous holiday or birthday gift for a child, grandchild, niece or nephew. You can help create a substantial education fund for a special child in your life over time.

Not All GIC’s are the same!

Guaranteed Interest Investments with banks, Credit Unions or Online banks such as Tangerine etc. do not have the same benefits as GIC’s with the Life Insurance Companies.

GIC’s and other investments with banking Institutions are subject to probate at the death of the owner or owners of the GIC’s, bank accounts or other investments.  Life Insurance Company GIC’s and Investment Funds/Segregated Funds can have named beneficiaries and can easily bypass the Probate process thereby avoiding probate fees, legal fees, time delays and lack of access to “Frozen” accounts.

Probate is the Court procedure for:

• A formal approval of the will by the Court as the valid last will of the deceased.
• Appointment of the person(s) who will act as the executors(s) of the Estate.
• Probate is the court process that gives the executor or executrix the authority to act on behalf of the deceased.  The probate process can take up to 3-4 months or longer to obtain the court’s approval for the executor to act.  
• Assets subject to probate cannot be accessed, sold, disbursed or used to pay debts until the Court approves the will to be valid and an executor to act on behalf of the deceased.

Probate fees are determined provincially – in Ontario the fee is 1.5% of the value of the Estate.  Legal fees to prepare and file the application, serving notice to potential beneficiaries, costs of preparing consents and any cost of securing any bonds or sureties if required can all be charged to the Estate as part of the expenses related to the probate process.

The Life Insurance Company GIC or Investment has the wondrous ability to avoid the Probate process.  Generally the death claim can be processed by a claimant’s statement signed by each beneficiary and a proof of death (Funeral Directors Statement or Coroners Death Certificate) is usually all that is required.  Periodically, a copy of the deceased’s will is also needed.  The Advisor and the Life Insurance Company DO NOT charge a fee to process the death claim!  Beneficiaries usually receive their share of the investment by cheque or electronic fund transfer to their own bank accounts within a few weeks.

Be conscious of the benefits of Life insurance Company GIC’s, segregated or Investment Funds versus those investment products offered by banks and other financial institutions.  Life Insurance company investment products offer primary beneficiary designations (i.e. spouse/partners) as well as a secondary or contingent beneficiary designations (i.e. adult children or minor children in trust) your estate planning can be simplified by using Life Insurance Company Investment products.  Speak to a qualified Financial Advisor about the opportunities a Life Insurance Company GIC or Investment product provides for you and your family.