What is a Segregated Fund?

Malcolm Tatum
Malcolm Tatum

Segregated funds are investment funds that are held within an insurance contract. The proceeds that are collected by the insurance company underwriting the contract are used to purchase the assets that generate the return on the fund. Depending on how the segregated fund is structured, the policyholder may look forward to a fixed return over the life of the contract, or receive the return once the fund has fully matured.

In some nations, the proceeds in a segregated fund can be paid directly to a beneficiary when the investor passes away.
In some nations, the proceeds in a segregated fund can be paid directly to a beneficiary when the investor passes away.

Key to the nature of a segregated fund is that the assets that are secured to provide the returns are not part of the general assets held by the insurance company. Assets acquired for the segregated fund are separate or segregated from the rest of the holders of the insurer, both in terms of record keeping and the administration of the fund itself. This creates a situation where the insured party not only has access to traditional life insurance coverage, but also stands to earn a return from the performance of the fund.

A segregated fund does have many of the same characteristics of a mutual fund. Both approaches require the direction of professional financial managers in order to earn the best return possible. The funds also provide investors with periodic reports that show the current status of the fund in general, and the performance of the holdings during the most recently closed time period. Like many mutual funds, the segregated fund offers the opportunity focus on investments within a defined industry or nation, or to diversify those holdings over a broad range of markets and industries.

When it comes to protecting the balance of the fund from creditors, investors can choose to name a revocable beneficiary, or an irrevocable beneficiary. The difference is that an irrevocable beneficiary can often limit or completely eliminate the access of creditors to an investor’s interest in the segregated fund. Since laws vary from one nation to another, it is important to consult a legal professional to determine the measure of protection that this preferred or irrevocable beneficiary designation will actually provide.

In some nations, the proceeds in a segregated fund can be paid directly to a beneficiary when the investor passes away, without the need to wait for his or her estate to go through a probate process. This can be especially helpful if the beneficiary is also the one responsible for making funeral arrangements and settling final expenses. As a bonus, many court systems do not require that personal information be released to the public when the proceeds are paid out, an advantage that is not usually available with a probate process.

Malcolm Tatum
Malcolm Tatum

After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including wiseGEEK, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.

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