Segregated Funds Explained: Guarantees, Resets, and Who They Are Actually For

Most Canadians have heard of mutual funds. Fewer have heard of segregated funds, and even fewer understand how they actually work. That is a problem, because for certain people in certain situations, segregated funds solve problems that mutual funds structurally cannot.

This is not a product pitch. Segregated funds are not the right answer for everyone, and they cost more than their mutual fund equivalents. But if you are a Canadian who cares about protecting your family's inheritance, shielding assets from creditors, or avoiding probate, you owe it to yourself to understand how they work before you decide they are not for you.

What Is a Segregated Fund?

A segregated fund is an investment product issued by a life insurance company. It holds a pool of underlying investments (stocks, bonds, balanced portfolios) similar to a mutual fund, but it is structured as an individual variable insurance contract (IVIC) rather than a security. That distinction matters more than most people realize.

Because it is an insurance contract, a segregated fund comes with guarantees that mutual funds cannot legally offer. Specifically, the insurance company guarantees that a minimum percentage of your deposits will be returned to you at contract maturity and to your named beneficiary upon your death, regardless of what the market does in between.

The underlying investments still fluctuate with the market. You are still exposed to gains and losses during the life of the contract. The guarantee is a floor, not a ceiling. If the market goes up, you participate in that growth. If the market drops and stays down, the guarantee ensures you or your beneficiaries receive at least the guaranteed percentage of what you put in.

The Three Guarantee Structures

Segregated fund contracts in Canada typically come in three configurations. The numbers represent the maturity guarantee and the death benefit guarantee, respectively.

75/75 is the baseline. You are guaranteed to receive at least 75% of your deposits back at maturity (typically 10 to 15 years) and your beneficiary receives at least 75% on death. This is the lowest cost option, but it also provides the least protection.

75/100 is the most common structure for families focused on estate planning. The maturity guarantee stays at 75%, but the death benefit guarantee rises to 100%. If you deposit $200,000 and the market drops 40%, your beneficiary still receives the full $200,000. This structure also qualifies for the annual reset feature, which is where things get interesting.

100/100 provides full protection on both maturity and death. You are guaranteed 100% of your deposits back at maturity and 100% to your beneficiary on death. This is the most expensive option, but it provides the strongest floor. It also qualifies for annual resets.

All guarantees are reduced proportionately by any withdrawals you make during the contract.

How the Annual Reset Works

The annual reset is the feature that separates segregated funds from most other guaranteed products. It is available on 75/100 and 100/100 contracts, and it works like this:

On each contract anniversary date, the insurance company compares your current market value to your existing death benefit guarantee. If the market value is higher, the guarantee automatically resets upward to match. If the market value is lower, nothing happens and your existing guarantee stays in place. The reset only moves in one direction: up.

This means your guarantee is not static. It ratchets higher every time the market reaches a new high on your anniversary date, locking in those gains permanently for your beneficiary.

Here is a concrete example. Suppose you deposit $100,000 into a 75/100 segregated fund with the annual reset option. Your initial death benefit guarantee is $100,000.

If the policyholder passed away in Year 8, when the market value was only $120,000, the beneficiary would receive $145,000. That is $25,000 more than the market value at the time, and $45,000 more than the original deposit. The reset captured the gains from the good years and protected them through the downturn.

The reset option is typically available until the annuitant reaches age 80. Some carriers have recently extended this from age 70 to 80, reflecting the reality that Canadians are living and investing longer. The reset does come with an additional fee built into the contract's management expense ratio.

Creditor Protection and Probate Bypass

Because segregated funds are insurance contracts with a named beneficiary, they offer two structural advantages that mutual funds cannot replicate.

Potential creditor protection. In certain circumstances, segregated fund assets may be protected from creditors. This is particularly relevant for business owners, professionals with liability exposure (physicians, dentists, lawyers, accountants), and anyone who wants an additional layer of protection around their investments. The protection is not absolute and depends on factors including the beneficiary designation, the timing of the deposit relative to any insolvency, and provincial legislation. But the structural possibility exists with segregated funds in a way that it does not with mutual funds or ETFs.

Probate bypass. When you name a beneficiary on a segregated fund contract, the death benefit is paid directly to that person. It does not flow through your estate, which means it is not subject to probate fees (called estate administration tax in Ontario) and it is not part of the public probate record. In provinces with significant probate fees, this can represent meaningful savings. It also means faster access to funds for your beneficiary, since they do not need to wait for the estate to be settled.

For context, Ontario charges $15 per $1,000 of estate value above $50,000. On a $500,000 estate, that is $6,750 in probate fees alone. Segregated fund proceeds paid to a named beneficiary avoid this entirely.

The Cost Question

Segregated funds cost more than mutual funds. That is not a hidden detail or a fine print issue. It is the direct consequence of the insurance company guaranteeing your principal.

The additional cost shows up in the management expense ratio (MER). A segregated fund will typically carry an MER that is 0.25% to 0.75% higher than a comparable mutual fund holding the same underlying investments. On a $200,000 portfolio, that translates to $500 to $1,500 per year in additional fees.

Whether that cost is worth it depends entirely on your situation. If you are 35 years old with no dependents, no business liability, and a 30-year time horizon, the guarantee is unlikely to justify the cost. You have time to ride out market downturns, and the compounding drag of higher fees over three decades is significant.

If you are 58 years old, you own a professional corporation, you have a spouse and children who depend on your estate, and you want to ensure that a market crash in your final years does not destroy the inheritance you have been building, the calculus changes. The guarantee has immediate practical value, the creditor protection matters, and the probate bypass saves real money.

The right answer is not "segregated funds are always better" or "segregated funds are always worse." The right answer is that they solve specific problems for specific people, and the cost is the price of that solution.

Who Should Consider Segregated Funds?

Segregated funds tend to make the most sense for Canadians who fit one or more of these profiles:

Near-retirees and retirees (age 50 and older) who want market participation with a guaranteed floor. The death benefit guarantee becomes more immediately relevant as you age, and the annual reset feature allows you to lock in gains during your accumulation years while protecting against late-career market downturns.

Business owners and incorporated professionals who want creditor protection on their investment assets. If you carry professional liability or operate a business with creditor exposure, segregated funds provide a structural layer of protection that is not available through mutual funds or ETFs.

Estate planners who want to bypass probate, maintain privacy, and ensure fast payment to beneficiaries. If you have named beneficiaries and want the death benefit to flow directly to them without going through your estate, segregated funds accomplish this by design.

Risk-averse investors who would otherwise keep too much money in GICs or savings accounts because they are afraid of market losses. The guarantee can provide the psychological floor that allows these investors to participate in equity markets they would otherwise avoid entirely.

What Segregated Funds Do Not Do

It is worth being clear about the limitations. Segregated funds do not guarantee positive returns. They guarantee a minimum floor on your deposits, adjusted for withdrawals. If you deposit $100,000 into a 75/75 contract and the market drops 50%, your maturity guarantee is $75,000, not $100,000. You still lost 25% of your deposit in that scenario.

Segregated funds also do not eliminate investment risk during the contract. Your account value still fluctuates with the market. The guarantee only applies at maturity or death. If you need to withdraw money during a downturn, you receive the market value, not the guaranteed value.

The creditor protection is potential, not guaranteed. It depends on the specific facts of each case, the applicable provincial legislation, and the timing of deposits relative to any insolvency proceedings. It should not be treated as an absolute shield.

The Bottom Line

Segregated funds are one of the most misunderstood products in Canadian financial planning. They are not exotic or complicated. They are insurance contracts that hold investments and provide guarantees that mutual funds cannot. The annual reset feature is a genuinely powerful mechanism for locking in market gains over time, and the creditor protection and probate bypass features solve real problems for the right clients.

The tradeoff is cost. You pay more for the guarantee, and that cost compounds over time. For younger investors with long time horizons and no special need for creditor protection or estate planning, the cost is hard to justify. For older Canadians, business owners, and families focused on protecting and transferring wealth, the cost may be well worth it.

If you want to see how the annual reset actually works with different guarantee structures, we built an interactive reset chart on our segregated funds page that lets you toggle between 75/75, 75/100, and 100/100 contracts and watch how the death benefit guarantee ratchets upward over a hypothetical 15-year period. It is worth spending two minutes with.

If you are not sure whether segregated funds belong in your plan, reach out to us. We will look at your full picture and tell you honestly whether the guarantee is worth the cost in your specific situation.

---

This article is for general educational purposes only and does not constitute personalized financial, investment, insurance, or tax advice. Segregated fund guarantees are subject to the terms and conditions of the individual insurance contract and are backed by the issuing insurance company. Guarantees are reduced proportionately by withdrawals. Creditor protection is not guaranteed and depends on applicable provincial legislation, beneficiary designations, and the specific circumstances of each case. Past market performance does not guarantee future results. Management expense ratios, guarantee structures, and reset provisions vary by carrier and contract series. Consult a licensed insurance professional before making any decisions about segregated fund products. Five Ridge Financial Ltd. is a licensed Associate General Agency operating in the province of Alberta.