Segregated Fund Guarantees, and What They Do Not Cover

The word guarantee does an enormous amount of work in a segregated fund conversation and almost none of it is examined. People hear it and understand something close to insulation from loss, which is not what the contract says and not what anybody is charging for. What a segregated fund contract actually contains is two promises about two specific moments: one about a date years from now, and one about the day the annuitant dies. On those two occasions the insurer will pay at least a stated proportion of what was put in, whatever the fund is worth. On every other day of the contract, the value is the value and the market does what it does. This page sets out both promises, when each is tested, what a withdrawal and a reset do to them, what they cost, and who is standing behind them. It prints no percentage, because the percentage that applies to you is a term of your own contract.

Two promises, two moments

A segregated fund contract is a life insurance contract whose value tracks a fund of investments. The regulator calls it an individual variable insurance contract, and the Autorite des marches financiers defines it as an individual contract of life insurance, including an annuity, under which the liabilities vary in amount depending upon the market value of a specified group of assets.

Inside that contract are two guarantees, and they are separate promises about separate events. The maturity guarantee attaches to a date. The death benefit guarantee attaches to a death. Neither one attaches to a bad quarter, a bad year, or the day you decide you have had enough.

That is the single most useful sentence on this page, and almost every complaint about these contracts comes from not having heard it. The guarantees are tested on two occasions. Everything that happens between those occasions is ordinary investing, with ordinary rises and ordinary falls, and the national guidance requires the policy itself to say so: any amount allocated to a segregated fund is invested at risk and may increase or decrease in value.

The maturity guarantee and when it is tested

The maturity guarantee promises that on the contract’s maturity date, the amount available will be at least a stated proportion of what was deposited, whatever the fund is worth on that day. If the fund is worth more, you have the fund. If it is worth less, the insurer makes up the difference to the guaranteed amount.

It is tested once, on that date. It is not a floor that operates continuously. A contract can spend a decade below its guaranteed amount without anything happening, and if the market has recovered by the maturity date the guarantee is never called on at all, which is the ordinary outcome and the reason the charge for it feels invisible.

The AMF also notes that the guarantee is exercised in a limited window around the contract anniversary, on written notice to the insurer. That is worth reading twice. A guarantee that has to be claimed within a window is a guarantee that can be missed by an owner who has stopped opening the envelopes, and the window is stated in the contract rather than in any article.

The maturity date and the contract term

The maturity date is not the day you retire, the day you need the money or the day you decide to sell. It is a date fixed by the contract, and it is the product of a minimum holding period that starts when a deposit is made.

The AMF describes that period as commonly ten years, with some contracts requiring twenty. Each new deposit generally carries its own period, which means a contract funded over several years does not have one maturity date but a schedule of them, and the guarantee on the newest money matures last.

The consequence is the one people find surprising. Money that may be needed before the maturity date is money on which the maturity guarantee will do nothing at all, because it will be withdrawn before the single date on which that guarantee is tested. That does not make the contract wrong; it makes the guarantee irrelevant to that portion of the money, and paying for it anyway is a choice worth making deliberately rather than by default. The Emergency Fund is a better home for money with a short horizon.

The death benefit guarantee and when it is tested

The death benefit guarantee promises that if the annuitant dies, the amount paid will be at least a stated proportion of what was deposited, whatever the fund is worth on the day of death. In practice the insurer pays the greater of the market value and the guaranteed amount, so the guarantee only shows itself when the market has been unkind.

This guarantee is tested on an event rather than a date, which makes it materially different in character from the maturity guarantee. It does not have to be waited for. It does not have to be claimed in a window. It has been in force since the deposit was made, and it stays in force until the contract ends. Because it is tested on a death, the amount goes to the named beneficiary and is claimed from the insurer directly. Beneficiary Designations covers who should be named and how.

Two conditions attach in most contracts and both are commonly missed. The guarantee is usually written on the life of the annuitant, who may or may not be the owner, so the event that triggers it is not always the event people assume. And the AMF notes that the guarantee may be reduced on deposits made after a certain age, such as eighty, which is precisely the age at which somebody may be thinking of buying one.

Why no percentage appears on this page

Guarantee levels get quoted casually, and quoting them casually is how a household ends up believing a number that is not in its own contract.

There is a regulated floor for the maturity guarantee, and above that floor insurers sell different levels at different prices. A single product commonly offers a lower cost option with a modest maturity guarantee and a higher cost option that guarantees the return of everything deposited on death. The death benefit guarantee is frequently set higher than the maturity guarantee in the same contract, because the insurer is pricing two different risks.

So the honest answer to what is my guarantee is that it is written in three documents you already have. The national guidance requires the insurer to provide the policy, the Information Folder describing the structure, features, fees and risks, and a Fund Facts for each fund; the AMF requires the representative to hand over the current information folder before you sign and to obtain your written acknowledgement. Those documents state your level, your holding period, your maturity date and your reset rights. Nothing on this site overrides them.

What a withdrawal does to the guaranteed amount

This is the mechanic that produces the most anger, and it is not hidden: the national guidance specifically requires the person selling the contract to explain the impact of withdrawals on the guarantees.

A withdrawal reduces the guaranteed amount. In most contracts the reduction is proportional rather than dollar for dollar, which means it is calculated on the share of the contract you took out, not on the dollars. When the market is down, that share is larger than it looks. Taking a fixed sum out of a contract that has fallen removes a bigger percentage of the contract than the same sum would have removed a year earlier, and it removes that same bigger percentage of the guarantee.

The practical rule follows from that. Withdrawing from a segregated fund in a poor market is more expensive than it appears, because you give up value and you shrink the promise that was supposed to protect that value. Withdrawing everything ends the guarantee entirely. Since 1 June 2023, Quebec has at least removed the sliding scale withdrawal and transfer charges that used to sit on top of this, under the regulation prohibiting certain fees on individual variable insurance contracts, but the reduction of the guarantee itself is not a fee and has not gone anywhere.

What a reset does, and what it costs

A reset raises the guaranteed amount to the current market value of the contract. If the fund has grown, a reset converts some of that growth from a gain the market can take back into an amount the insurer has promised. Where a contract allows it, the national guidance treats the reset as a contractual right belonging to the customer.

The price is usually the calendar. A reset generally restarts the minimum holding period, so the maturity date moves further out by the length of that period. An owner who resets at sixty on a contract with a ten year period has a maturity date at seventy. Reset again at sixty five and it is at seventy five. The guaranteed amount went up each time and the date the owner cared about went away each time.

Contracts differ in how resets work, and the differences matter more than the existence of the feature. Some reset automatically on a schedule, which is convenient and can move your maturity date without a decision on your part. Some require a request inside a window. Some cap the number allowed each year. Some price the higher guarantee into a higher annual charge. The rule is the same in every case: a reset moves the amount and the date together, and the date is the half people forget.

A guarantee at a date is not a guarantee against loss

Put the two ideas side by side, because the gap between them is where the misunderstanding lives.

A guarantee against market loss would mean the value of your holding cannot fall. No segregated fund contract offers that, no fund of any kind offers it, and nothing being sold as an investment in Canada offers it. What the contract offers is a guarantee about the amount payable on two specific occasions. Between those occasions your statement can fall a long way, and you carry that the same as any other investor.

The difference has a practical edge. If your reason for buying is that you cannot tolerate a falling statement, this contract does not solve the problem you have; it charges you annually for a benefit at a date you may never reach while leaving the falling statement exactly where it was. The problem you have is a question of how the money is invested in the first place. Risk Tolerance and Asset Allocation are where that is solved, and they are solved before the choice of wrapper, not after it.

Who is actually making the promise

A guarantee is only as good as the party giving it, so it is worth saying plainly who that party is. The guarantee in a segregated fund contract is a contractual promise by the insurer that issued the contract. It is not a promise by the federal government, by any province, or by any regulator. No public body has undertaken to pay it.

What stands behind it is real and it is limited. The insurer is subject to capital and solvency supervision, which is the first line and the one that matters most in practice. Behind that is Assuris, which protects the guaranteed amounts under contracts issued by a failed member insurer, within limits it publishes and revises from time to time, and which states that the value of the fund itself is a separate question from the guarantee.

And the deposit comparison has to be put away for good, because it causes real confusion. A premium paid into an insurance contract is not a deposit, and a segregated fund contract is not a deposit account. Canada Deposit Insurance Corporation coverage applies to eligible deposits at member institutions and does not apply here. Assuris is the protection that applies to this contract, and its current limits should be read from Assuris rather than from anybody selling you something.

What the guarantee costs, and where the charge sits

The guarantee is an insurance benefit and it is priced like one. The charge is built into the annual management expense ratio of the fund rather than billed separately, which is why a segregated fund normally carries a higher ratio than a mutual fund with the same mandate. The AMF makes this point directly in its consumer material, setting the two levels beside each other and naming the difference as the cost of the guarantee.

Two things follow. The charge is levied every year, in good years and bad, whether either guarantee is ever tested or not, and it compounds against your return in exactly the way any other annual charge does. And a higher guarantee level generally costs more than a lower one, which is why the same fund can be bought at more than one price inside the same product. What a MER Is Really Costing You shows the arithmetic over a long holding period.

None of that makes the charge unreasonable. It makes it a purchase. The question to ask before signing is not whether a guarantee is nice to have, because it always is, but which of these two specific promises is likely to be tested in your circumstances, and whether that likelihood is worth an annual charge levied for as long as you hold the contract.

What to read in your own contract

Everything above is general. Six items are specific to you, and all six are in documents you were given.

The guarantee level for maturity and the guarantee level on death, which are often different. The minimum holding period and the maturity date it produces for each deposit. The window in which the maturity guarantee must be claimed and the notice required. Whether the contract resets automatically or on request, how often, and what a reset does to the maturity date. How a withdrawal reduces the guaranteed amount, proportionally or otherwise. Any reduction that applies to deposits made after a stated age.

If you cannot find all six in your Information Folder, your Fund Facts and your policy, ask the representative who sold it to you to point to each one in the documents. The AMF requires that the current information folder be delivered before the application is signed and that your acknowledgement be obtained, so the papers exist. A contract nobody can explain from its own wording is a contract that has not been explained. Segregated Funds and Mutual Funds Compared sets these guarantees against the alternative.

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Read Segregated Funds and Mutual Funds Compared for what else the insurance form changes, The Guaranteed Withdrawal Benefit for the income version of the same idea, and Creditor Protection and Segregated Funds for the feature that has nothing to do with markets. Segregated Funds is the product page, and the Investment Options guide sets the whole range side by side.