1. Introduction to Segregated Funds
Presented by: Sarah Daly
Date: January 19, 2009
HEPC

2. Agenda What are Segregated Funds and what can they offer? Guarantees
Resets
Potential Creditor Protection
Probate Protection
Who Might Find Segregated Funds Attractive?
Empire Life in the Segregated Fund Industry
Empire Life Segregated Funds

3. What are Segregated Funds and what can they offer?
Segregated Funds are investment funds that pool together the assets of investors like you with similar objectives who want to:
diversify their investments;
reduce their risk and;
lower their investment costs.
In addition, they also offer:
Minimum of 75% Maturity Guarantee on net deposits
100% Death Benefit Guarantee
Resets
Creditor Protection
Estate Planning

4. Guarantees There are two types of Guarantees:
Maturity Benefit Guarantee (MBG)
Death Benefit Guarantee (DBG)

5. Maturity Benefit Guarantee (MGB)
A unique feature of segregated funds is that they offer capital protection of a minimum of 75% of the client’s net deposit and up to 100% of the client net deposit.
There must to be at least 10 years to the maturity date
Tip: Segregated funds can be good for some long-term investors who want to invest in equity mutual funds but who are not comfortable with the risk.

6. Death Benefit Guarantee (DBG)
The DBG varies from 75% to 100% of the client’s net deposits

7. How Guarantees Work-Worst Case Scenario
Client invests $100,000
Example. John invests $100,000 in segregated fund policy and names his wife as plan beneficiary.  The policy offers a 75% guarantee on maturity and 100% on death. If at the time of Peter’s death, the plan is worth $100,000, his wife will receive the full $100,000.
If in 10 years the contract is worth $100,000, Peter will receive the full $100,000. If in 10 years the plan is worth $50,000, Peter will receive the guaranteed amount $75,000.
*All numbers are hypothetical used for illustration purposes only

8. How Guarantees Work-Best Case Scenario
Client invests $100,000
Let’s assume that after 10 years the market value became $122,000. This becomes the new policy value at maturity.
Market Value Guaranteed Value
*All numbers are hypothetical used for illustration purposes only

9. Resets
Resets = lock-in gains when the policy market value is higher than the guarantees
Resets can either be automatic or manual
Maturity dates could be extended with resets
Need a minimum of 10 years to maturity date

10. How Resets works
Above is an example illustrating the benefits of resets.
Anne deposited $100,000 in December 1991 in an aggressive portfolio. Anne decides to reset once every year. Resets can only be made when there is at least 10 years left before maturity. Therefore Anne is allowed 5 resets from 1991 to As can be seen, no resets were made when the market was down, and the last reset locks-in the gains and the new amount becomes Anne’s new guaranteed amount.
If Anne had not reset, her policy value after 15 years would have been $417,725 instead of $449,935, as her investment would be making on average 10%
Calculations were based on 80% S&P/TSX Index and 20% Scotia Universe Bond Index, from Dec. 91 to Dec. 06
**Calculations were based on 80% S&P/TSX Index and 20% Scotia Universe Bond Index, from Dec. 91 to Dec. 06

11. Potential Creditor Protection
When certain qualifications are met, segregated fund investments may be protected from seizure from creditors.
This is an important feature for business owners or professionals whose assets may have a high exposure to creditors.

12. Potential Creditor Protection Example
Frank, a business owner, had died leaving a non-registered seg fund to his wife, and named his wife as the beneficiary. His business had gone bankrupt shortly before his death and his estate still owed the bank a large amount of money.
True or False
Answer: False-The bank can seize everything except the seg fund, because the seg fund was in Frank’s name and his wife was named beneficiary

13. Probate Protection Avoid Probate and estate fees
Transfer assets without delays
Distribute assets with privacy

14. Probate Protection Example
Non-Registered Mutual Fund
Non-Registered Seg Fund
Deposit
$150,000
Market Value upon death
$135,000
$132,000
DSC
$6,750
Waived by Empire Life
Probate and estate fees*
$1,525
None
Death benefit Top-up
$18,000
Timing of payment
Several weeks or Longer
A Couple of Weeks
Amount to Beneficiaries
$126,725
*Based on Ontario probate fees

15. Who Might Find Segregated Funds Attractive?
People who aren’t interested in managing their own investment daily
Investors who are attracted to some guarantees of their original deposit (less a proportional reduction for any withdrawals)
Self-employed individuals and certain professionals, such as engineers, doctors, etc., who have a high degree of potential creditor and liability risks
More affluent investors looking to preserve their wealth and keep some investments private ( outside the will)

16. Difference in 1% change in MER
The following chart shows how a high MER can erode a policy’s growth over time. Compare five different funds with MERs from 2.5% to 3.5%, earning an 8% gross return. Over 10 years, the client investing in a fund with the 2.5% MER would make $1,551 more than the fund with the highest MER, or 10% more.
Assumes: Both funds earned 8% gross return with no front-end or back-end loads. The average annual compound returns reported would be 5.5% for the fund with the lowest MER and 4.5% for the fund with the highest MER.

17. Scenario
Jim Henderson has owned and managed the Mill Street Grill for 6 years. Jim is in his second marriage, and has two children from his first marriage. Jim is 20 years away from retirement.
$100,000 to invest, 48.80% Income Tax bracket
Jim’s Objectives and concerns:
Interested in capital preservation and creditor protection
Hopes to minimize taxes and expenses on his estate
He wants his heirs to receive their inheritance quickly
Jim wants to leave certain amounts to his two children privately, outside of the will

18. Jim’s $100,000 Investment Performance in a Registered segregated fund*
Empire Elite Equity: $100,000 initial investment on 9/30/1987; subsequent investments of $100 every 3 months. Income and capital gains tax liability periods are shown, using 36.60% for capital gains taxes and 48.80% for Income taxes (based on the province of Ontario).
Jim has the option to reset twice per calendar year, he can do so in the 10 years.
*Source: GlobeHysales (Empire Life Elite equity fund – class A

19. Registered vs. Non-registered
The Tax Deferred Accumulation plan illustrates the advantage of tax-deferred growth by showing the difference in final investment amounts for both a taxable and tax-deferred scenario. Note that Tax-deferred investments will eventually be taxed.
Jim’s initial investment of $100,000 will grow to $499,096 in 20 years in a registered Empire Elite Equity fund, earning on average 8%, compared to only $255,403 in a taxable instrument. This is assuming that Jim is in the 40% tax bracket.
Source: Globe Hysales

20. Traditional Mutual Funds
Get more for your money with Segregated Funds.
Segregated Funds
Traditional Mutual Funds
Maturity Guarantee
Yes No
Death Benefit Guarantee
Ability to Lock-in Gains Through Re-set Option
Potential for Creditor Protection
Yes (bankruptcy protection only)
Freedom from Estate and Probate Fees
Only occasionally on registered plans
Deposits protected by consumer protection organization (within prescribed limits)
Yes (Assuris)

21. Guaranteed Minimum Withdrawal Benefit
Similar to a pension plan
Provides a minimum guarantee payment of 5% for life
Commencing age 65 or later
Same features as a segregated fund with added guaranteed income
Lock in market gains every 3 years providing for an increase in current and future income stream

22. Questions?

23. Disclaimer
Past performance is no guarantee of future performance. Empire Life Portfolio Funds currently invest in Class A units of the secondary funds.
The information in this presentation is for general information purposes only and is not to be construed as providing legal, tax, financial or professional advice. The Empire Life Insurance Company assumes no responsibility for any reliance made or misuse or omissions of the information contained in this presentation. Please seek professional advice before making any decision.
A description of the key features of the individual variable insurance contract is contained in the Information Folder for the product being considered. Subject to any applicable Death and Maturity Benefit Guarantee, any part of the premium/deposit or other amount that is allocated to a Segregated Fund is invested at the risk of the Plan/Contract Owner and may increase or decrease in value according to the fluctuations in the market value of the assets of the Segregated Fund.
TM Trademark of The Empire Life Insurance Company. Policies are issued by The Empire Life Insurance Company.
September 2008

24. Introduction to Segregated Funds