What are Segregated Funds and How Do They Work?

Canadians are living longer — which is good news — but the financial side of that story is a little more complicated. Nearly half of Canadians aged 55 to 75 worry about outliving their savings or lacking guaranteed income in retirement, according to an RBC Insurance poll.

Many people know the usual retirement savings tools, such as RRSPs and TFSAs, but not everyone understands segregated funds. These investments combine the growth potential of market investments with insurance protection, and can offer valuable estate-planning advantages.

This guide covers what are segregated funds, how they differ from mutual funds, and when they may make sense as part of a retirement portfolio.

Key takeaways

• Segregated funds combine investing with insurance protection. They work a lot like mutual funds, but with built-in guarantees.

• You can hold them in many account types. Seg funds can be placed in registered accounts (like RRSPs, RRIFs, TFSAs) or non-registered accounts.

• A portion of your investment is protected. Most segregated funds guarantee between 75 and 100 per cent of the amount you invest at maturity or death.

• You may be able to lock in gains. Some contracts allow you to “reset” the guarantee if the value of your investment increases.

• Assets can pass directly to beneficiaries. If you name a beneficiary, the proceeds may go directly to them rather than through your estate.

• They may offer creditor protection. In certain situations, segregated funds may help protect assets from creditors — something that can be particularly relevant for business owners.

What are segregated funds?

Segregated funds — also called seg funds or guaranteed investment funds (GIFs) — are investment products sold by insurance companies. When you buy one, you enter into an insurance contract that invests your money in underlying assets, such as stocks, bonds, and other securities.

What makes them different from mutual funds is the built-in guarantee. Seg funds typically protect a portion of the money you invest — usually between 75 per cent and 100 per cent. Even if the underlying investments lose value, the guarantee ensures you’ll get back some or all of your original investment at maturity or death.

That protection comes with considerations, though. To qualify for the guarantee, you typically need to hold the fund for a set period, often about 10 years. Because of the built-in insurance component, segregated funds usually carry higher fees than comparable mutual funds.

Segregated funds can only be purchased through a life insurance advisor. Have an RBC Insurance advisor contact you to learn more.

Read more: Compare RBC GIF Series

How do segregated funds work?

At their core, segregated funds combine investing with insurance protection. Here are some of the key features that set them apart.

Guaranteed principal protection

Segregated funds include two types of guarantees: a maturity guarantee and a death benefit guarantee. If the investment is worth less when the contract matures or when you pass away, you or your beneficiaries may receive up to 100 per cent of the amount originally invested (less fees) or the current market value — whichever is higher.

Professionally managed

Seg funds are managed by professional portfolio managers who make investment decisions on behalf of investors. You You can only purchase them through a licensed insurance advisor – not through a stock exchange or brokerage account.The value of your investment rises or falls based on how the underlying investments perform.

Flexible investment options

Segregated funds come in many styles, from conservative income-focused portfolios to growth-oriented funds. They may invest in money market securities, bonds, or equities in Canadian and global markets, allowing investors to choose options that match their goals and risk tolerance.

At RBC Insurance, investors can choose from 28 individual GIFs and eight portfolio solutions.

Versatile account options

Segregated funds can be held in a wide variety of account types, including RRSPs, RRIFs, TFSAs, non-registered accounts, or locked-in plans (e.g., LIRAs, LIFs, etc.).

Flexible deposits and switches

You can make lump sum or regular contributions to your seg fund, as well as switch money between available funds within your contract as your needs change. However, minimum requirements may apply.

Withdraw when you need it

You can withdraw part or all of your investment at the current market value. To access the guaranteed amount, however, you typically need to hold the investment until the maturity date or the death benefit applies.

If your fund is held within a RRIF or LIF, you can also set up scheduled payments, such as monthly, semi-annual, or annual withdrawals.

Ability to reset the guaranteed amount

If your investment grows in value, you may be able to “reset” the guarantee to lock in those gains. For example, if you invest $10,000 and the fund later grows to $20,000, the guaranteed amount may be reset to the higher value. In many cases, the maturity date is also extended when a reset is made.

Fund charges

Segregated funds charge management fees that vary by fund, and are typically expressed as an annual percentage of the fund’s value. Because of the insurance guarantees, these fees are often higher than comparable mutual funds. Additional fees may also apply for deposits, switching funds, or withdrawals. Full details are outlined in the fund contract.

How do segregated funds differ from mutual funds?

Both segregated funds and mutual funds pool money from investors and are managed by professional portfolio managers. The key difference is that segregated funds are insurance contracts offered by life insurance companies. Because of this structure, they come with features mutual funds typically don’t offer.

For example, mutual funds rise and fall with the market, meaning your investment is fully exposed to market volatility with no protection. Segregated funds also fluctuate with the market, but their guarantee can help protect a portion of the investment at maturity or death.

They may also offer potential creditor protection and allow assets to pass directly to named beneficiaries, which may help simplify estate transfers.

In a nutshell, segregated funds work much like mutual funds — but with built-in insurance protections.

Read more: Segregated funds vs. mutual funds: Understanding the differences

What are the benefits of segregated funds?

Segregated funds are a bit like investments with built-in guardrails — helping your savings grow while offering some protection along the way. Here’s a snapshot of the key benefits.

Principal protection

Segregated funds typically guarantee a portion of the money (e.g., 75 to 100 per cent) you invest at maturity or death, shielding part of your original investment from market ups and downs.

Ability to lock in market gains

Some contracts allow you to reset the guarantee if your investment grows, helping lock in gains over time.

Flexible investing options

You can make lump-sumor regular contributions, switch between funds, and withdraw money when needed (though withdrawals may reduce the guaranteed amount).

Professional management

Segregated funds are purchased through a licensed insurance advisor and administered by professional portfolio managers who can help align investments with your financial goals.

Growth potential

Your money is invested across a mix of asset classes — such as stocks and bonds in Canadian, U.S., and global markets — offering diversification and potential for long-term growth.

Potential creditor protection

Because segregated funds are insurance products, they may offer protection from creditors in certain situations.

Estate planning benefits

Segregated funds can pass directly to a named beneficiary, which may help avoid probate and allow assets to be transferred faster.

Who should invest in segregated funds?

Segregated funds can work for many types of investor, but they may be particularly useful for people who want some protection for their savings while still investing in the market. Because of their insurance features and estate-planning advantages, they can be especially relevant at certain life stages or for specific financial situations.

Business owners and entrepreneurs

Running a business often comes with financial uncertainties, and protecting personal wealth can be a priority. Segregated funds allow business owners to invest in market-based portfolios while keeping some protection in place through their guarantees.

Segregated funds may also offer some tax flexibility. Income, capital gains, and capital losses from the fund are reported directly to the contract owner. In some situations, this may allow investors to use capital losses to offset capital gains on their tax return.

Segregated funds can also play a role in business succession planning. In some cases, they may be used as part of a broader strategy to help fund a buy-sell agreement between business partners.

Conservative investors

Segregated funds come in a range of investment styles, including more conservative portfolios focused on stability and income. That can make them worth considering for investors who feel uneasy about market swings.

Canadians approaching retirement

For Canadians getting closer to retirement, there may be less time to recover from market losses. Seg funds can help protect a portion of your savings while generating reliable income.

Many segregated funds allow you to withdraw a set amount of income each year, helping create a predictable cash flow once regular paycheques stop.

Segregated funds can also support estate planning. Because you can name a beneficiary, the death benefit may pass directly to that person rather than through the estate, helping simplify the transfer of assets, and in some cases, avoid probate. That can be especially helpful for those who want to provide financial support to a spouse, children, or other dependents.

Some contracts also include a reset feature, which allows investors to lock in gains if the investment grows in value, ensuring the guaranteed amount reflects the higher portfolio value.

Are segregated funds right for you?

Segregated funds can offer a way to invest in the market while keeping some protection in place for the future. For some people, that balance between growth and security can bring added peace of mind.

Of course, no investment is one-size-fits-all. It’s important to consider your financial goals, your comfort with risk, and how a product like this might fit into your overall financial plan. A licensed RBC Insurance advisor can help walk you through the options, explain the costs, and determine whether segregated funds make sense for your situation. Book a call to learn more.

RBC Segregated Funds

Segregated Funds–such as RBC Guaranteed Investment Funds (GIFs)–offer unique benefits that can help you reach your retirement goals.

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