Please note I am not a financial adviser or an insurance broker. This post is for information purpose only.
Segregated funds have always been a highly debated product. After years of stagnation, they are making a come-back. In 2015, the total amount of money held in segregated funds in Canada rose by close to 17%.
But, what is a segregated fund?
A segregated fund or -seg- is a product combining both investment and insurance. To sum it up, it works like an “insured mutual fund”. The insurance portion guarantees 75% to 100% of the principal invested. Monies are invested in stocks or bonds.
Segs are considered an insurance product and are usually sold by insurance companies. That’s it for the basics.
what are the advantages?
The main perk of this product is that you are guaranteed to receive the majority of your money back. If the investment portion performs well, you could actually end-up with a lot more money.
The insurance portion also offers a death benefit that is not subject to probate. The money held is also protected from creditors. Should you file for bankruptcy, your seg is off-limit.
what are the DISADVANTAGES?
Segregated funds are very expensive. The management expense ratio -MER-on these products can be easily over 3%. As a reminder, the MER is deducted from the fund’s return.
Your money is also locked-in for 10 or 15 years, depending on the contract. If you decide to cash out before the term, you will be paying a hefty penalty and deferred sales charges. They are very few “no load” segregated funds. “No load” means you are not paying any fees for buying or selling.
Because segregated funds are insurance products, they do not have to comply with the new CRM2 rules on investments. Holders are largely kept in the dark as to the actual costs of their segs.
who are segregated funds for?
They could be of interest for:
- Self-employed people or small business owners mainly to protect their assets from creditors
- People who are really, really terrified of market risk and close to retirement
- People who are in very poor health and at a very high risk of dying soon
To be honest, there aren’t that many people who actually benefit from having segregated funds. Better and cheaper results can usually be achieved by purchasing a separate life insurance policy and investments.
Just like any financial product, you need to do your own research and cost-benefit analysis to see if a segregated fund makes sense for you.