How segregated funds can benefit business owners

Key takeaways

Segregated fund policies can help solve many of the challenges faced by business owners including potential creditor protection and succession planning.

Financial challenges business owners face

Business owners face unique financial challenges which segregated fund policies can help solve, such as:

Helping to protect against market volatility and economic downturns.
Helping ensure business continuity and succession planning.
Helping to allocate capital gains and losses to the investor so they may claim excess capital losses.

Benefits of segregated fund policies for business owners

Capital protection: Segregated fund policies offer a guarantee on a portion of the invested capital, typically 75% to 100%, which appeals to business owners seeking to protect their principal investment.
Estate planning: Investors can designate named beneficiaries who aren’t the estate directly, which means that when the investor passes away, the funds can be quickly and efficiently transferred to the beneficiaries outside of the estate, helping to avoid delays and administrative costs associated with probate.
Potential creditor protection: Segregated fund policies can offer protection from creditors, which may be particularly helpful to business owners concerned about personal liability and protecting their personal assets from business-related risks such as lawsuits or bankruptcy.
Potential tax advantages: Registered segregated fund policies may offer tax-deferred investment growth. In addition, unlike mutual funds, segregated funds can allocate income and capital gains/losses annually. Capital losses allocated to policyowners are available to offset capital gains from disposition of other property in the same year and any excess can be carried back 3 years or carried forward for future offset against capital gains. This may help business owners optimize their tax situation.
Professional management: Segregated funds are professionally managed, helping provide business owners with confidence that their investments are being handled by experts.

A case study

Our business owner

Nasser is in his early 40s and owns a grocery store. His spouse is on maternity leave with 3 young children.

While he has no life insurance or healthcare benefits, he does have a significant mortgage and registered and non-registered investments in mutual funds, stocks and guaranteed investment certificates.

His goals

Nasser is looking to ensure that ongoing expenses are taken care of in the event of his untimely death. He wants to simplify his estate because business liquidation will already be complicated. He intends to leave 100% of his money to his wife and children.

Why a segregated fund policy may be a great solution

Asset consolidation: Nasser will have all his finances in one place, making it easier for him to manage.
Potential creditor protection and growth: As a small business owner, investing in a segregated fund policy allows Nasser to have protection for his money and help ensure certain beneficiaries take priority over the claims of creditors.
Seamless way to pass on wealth and save on costs: If Nasser were to die suddenly, a segregated fund policy also helps ensure his wife could access the funds without time-consuming and costly administration. This will help reduce worrying about having money to cover her living expenses since even when there’s a will in place, the transfer of non-registered money (as in Nasser’s case), can be a tedious and lengthy process.

What’s next?

Talk with your advisor to learn how segregated funds may meet your investment needs.

You’ll find the detailed descriptions of the segregated fund policy in the information folder provided by your financial advisor. Any amount that is allocated to a segregated fund is invested at the risk of the policyowner and may increase or decrease in value.

In Saskatchewan, executors must disclose all known life insurance policies owned by the deceased including segregated fund policies. They must list the insurance company, policy number, designated beneficiaries and the value at the date of death.

Creditor protection may be possible because provincial insurance laws state that life insurance contracts, including variable annuity contracts such as segregated funds, may be exempt from seizure by creditors if the owner has designated certain related persons as the beneficiary of the contract. The beneficiary can be a spouse, child, parent or grandchild of the annuitant. However, since creditor protection may be lost under certain circumstances, it’s advisable to discuss each individual situation with a lawyer.

Creditor protection depends on court decisions and applicable legislation, which can be subject to change and can vary from each province; it can never be guaranteed. Talk to your lawyer to find out more about the potential for creditor protection for your specific situation.

The information provided is general in nature and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.