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Do you really get a guarantee with your segregated fund?

One of the selling features of segregated funds is the capital or maturity guarantee. You'll hear sales pitches touting how it's possible to get your money back in 10 or 15 years if the market tanks. And with volatile markets, that's going to sway some investors. But it turns out that you might want to double check your contract to make sure you're actually getting those guarantees.

Sometimes I read fine print for fun. Even for contracts I don't own. By the way, if you're an insomniac, try reading an information folder for segregated funds. They're long and dry, but incredibly important.

With one particular insurance company, unless you specify it on the application form, the maturity guarantee date defaults to Dec. 31 of the year you turn 120. A lot of good that will do. Luckily you can amend the contract, but unluckily the soonest you can set the new maturity date is 10 years from when they receive your request for the change. So if you bought it at 40, wanted to take advantage of the guarantee at 50 only to find out it was set to 120, the earliest your guarantee can be adjusted to is when you turn 60.

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Another detail you'll want to check on is whether your guarantee is deposit-based or contract-based. With a deposit-based guarantee if you put money into the policy every year, each deposit has its own 10-year guarantee date. A contract-based guarantee might allow you to make contributions over a 10-year period and have every dollar guaranteed after the 10-year anniversary of when you first set up the policy. These are pretty rare today, since the risk is greater of having to pay a maturity guarantee benefit should your portfolio be under water.

And, of course, the base level of maturity guarantee is only for 75 per cent of the principal. You have to pay extra for 100 per cent protection, which begs the question of how many 10- or 15-year portfolios are underwater if you don't tinker with them? And does the probability of a subsequent 10- or 15-year period of negative growth change when the previous 10- or 15-year period was one of the few occurrences of negative growth? The best market returns have traditionally been had right after the worst, so the need for market performance insurance for the subsequent 10 or 15 years is lower.

Segregated funds are hopefully not sold based on maturity guarantees alone as there are other benefits such as the ability to reset guarantees, creditor protection, the flow-through of capital losses in some cases and more. But with all the nuances involved, this is an investment you will want an experienced adviser to provide counsel on. Because it's easy to miss some important details when you're half asleep while reading the pages and pages of fine print.

Preet Banerjee, BSc, FMA, DMS, FCSI is a W Network Money Expert, and blogs at . You can also follow him on twitter at @PreetBanerjee

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