Mutual Funds Or Segregated Funds: Which is Best for You?

If you’re meeting with an advisor for the first time, a lot of strange vocabulary can be thrown at you. Government Bonds, ETFs, Segregated Funds, GICs, and Mutual Funds are just the beginning. It can be overwhelming! Let's break down two of these commonly used investment vehicles to better understand which might meet your financial needs best; Segregated Funds or Mutual Funds.

Advocis, the Financial Advisors Association of Canada, explains very clearly in their Financial Topics the difference between Segregated Funds and Mutual Funds. In its most basic form, Segregated Funds are an investment with an added insurance policy protecting it. These insured guarantees are generally between 75% to 100% protection of the principal on both death and maturity. If you invest $150,000 into a given Segregated Fund and the market performs well, you keep the principal and the market gains. If the market tanks and the value dips below your initial investment of $150,000, your principal is still protected based on the guarantees you choose. This feature protects your investment from downhill markets and provides a safety net for your money. Historically, these investments have been much more conservative than the stock market, but they have since branched out to include a more varied series of managed funds to mirror the wide array of different mutual funds. So which is best for you?

PHOTO CREDIT: nettyandsamestes

Each Segregated Fund and Mutual Fund may be better than each other in different circumstances, so it will always depend on personal factors and investment styles. Empire Life provides a very clear breakdown of the key differences between the two products. While segregated funds offer increased protection, they can come at a higher management cost depending on how much protection or which features you choose. Mutual funds, on the other hand, do not provide such guarantees but can be cheaper to manage. Empire Life suggests that if you're nearing retirement or have a low-risk tolerance and appreciate the guarantees, Segregated Funds might be best for you. If you want a wider array of fund investment choices and don’t need the guarantees, Mutual Funds may be better for you. As always, each of these have different tax and estate planning implications, so it is always recommended to contact an advisor to get the best advice personally tailored for your financial future.

Now that you know a little more about Segregated Funds and Mutual Funds, contact an advisor today to speak with them to receive the advice you need for your future to invest with a personal plan.

Lifeplan Financial is a locally owned Managing General Agency (MGA) in Victoria and we work hard to give advisors the tools they need to succeed across all of British Columbia.  We give our advisors the independence they need with the support they deserve. “Because Your Success… is Our Success.”

Permanent Insurance: 3 Reasons to Buy Today Before Tax Changes Effective January 1, 2017.

Now is the time to invest in permanent insurance. Since 1982, permanent insurance policies have been an incredibly effective tax-sheltering vehicle for investment growth in the form of cash values. Effective January 1, 2017 however, the CRA is implementing new changes that will limit the effectiveness of using permanent insurance in this way.

 

Current Canadian Rules

John McKay, Executive Vice-President and Actuary at PPI Solutions breaks down what the current CRA rules are here. He agrees permanent insurance policies are effective due to the cash values built inside that grow tax-free. This, in turn, makes insurance premiums cheaper and more affordable. If, at any point, the values inside grow to exceed the tax sheltered limits, insurance companies will automatically modify the policy to retain the tax-exempt status by either returning cash values to you, or by increasing the death benefit; whichever option was selected at application.

These current rules will generally be carried forward (or ‘grandfathered’) if the policy is applied for, and issued, before January 1, 2017.

PHOTO CREDIT: Forbes

 

New Canadian Rules

Canada’s Department of Finance and CRA are updating these rules on January 1, 2017 to reflect current mortality rates, to limit the use of permanent insurance products as investments, and to standardize tax rules across all insurance carriers. John McKay goes on to explain that the CRA changes will increase the tax-sheltering limit within the first 10 years, but will decrease it in the long-term. SunLife Insurance adds, in this article, that Universal Life Level Cost of Insurance (LCOI) premiums will be most negatively affected with premium increases. As the Net Cost of Pure Insurance (NCPI) decreases along with mortality rates after the changes, the Adjusted Cost Basis (ACB) will increase and drive up premiums. Policy premium prepayments will also be extended from a minimum of 1 year to 8 years to prevent policyholders from dumping money in the policy at the beginning for a short period of time to take advantage of the tax-free growth.

The coming tax changes effective January 1, 2017 will, for the most part, negatively impact the use of permanent insurance products as tax-free investment vehicles.

The following are three reasons to buy today before these changes take place.

1. More Tax-Free Growth – If bought today, permanent insurance products will have more room for tax-free growth for optimal estate planning.

2. Lower Premiums – Minimum premiums will increase with the new rules; especially for Universal Life LCOI policies.

3. Deposit Freedom – There will be less freedom to deposit lump sums of money to pay for premiums as a new 8-year minimums are enforced with the new changes.  

If bought today, nearly every policy will be ‘grandfathered’ with current CRA guidelines. Contact an advisor today to discuss your specific estate planning needs and determine if incorporating a permanent insurance product could help you save for your future.