What Are Segregated Funds And Who Are They Right For? (Canada)

Summary

In this video, Philip Zetter, founder of Affinity Life, critiques segregated funds, an insurance product where investments are wrapped in an insurance contract. He explains how these funds offer guarantees like death benefit and maturity guarantees, which protect investors' principal amounts. Despite the added security, Zetter argues that the higher fees and weak maturity guarantees make segregated funds less appealing for most, recommending them primarily for those nearing retirement or estate planning.

Takeaways

• 🏦 Segregated funds are insurance companies' response to banks selling investments, aiming to offer investment products with an insurance wrapper.
• 📈 These funds are similar to mutual funds or ETFs but come with additional management expense ratios (MERs) due to the insurance component.
• 💰 The main selling points of segregated funds are guarantees, including death benefit guarantees and maturity guarantees, which protect the principal amount.
• 🔄 Resets allow policyholders to lock in gains at a new principal amount, with the trade-off of extending the maturity period.
• 👴 Segregated funds can be beneficial for retirees or those close to estate planning, offering protection against market fluctuations and probate fees.
• 💵 The death benefit guarantee ensures that beneficiaries receive at least the original principal amount if the policyholder dies.
• 🔗 The maturity guarantee provides a minimum return of the principal amount after a set period, typically 10 or 15 years, even if the market value has dropped.
• 💼 Creditor protection is an advantage of segregated funds, as they can be shielded from lawsuits and liabilities if a beneficiary is assigned.
• 💸 High fees are a significant drawback, with MERs potentially being 1-1.5% higher than similar non-segregated investment products.
• ❌ For younger investors or those with a long investment horizon, the costs of segregated funds may outweigh the benefits, making traditional investments a more suitable choice.

Q & A

What is the speaker's opinion on mortgage life insurance?

The speaker believes mortgage life insurance is a terrible product created by banks to mimic the success of insurance companies.

What is a segregated fund as explained in the video?

A segregated fund is an insurance product where an existing investment fund is wrapped with an insurance contract, offering guarantees and additional fees.

What are the two major components sold with segregated funds?

The two major components are the death benefit guarantee and the maturity guarantee, both of which offer protection of the principal amount under certain conditions.

How does the death benefit guarantee work in segregated funds?

The death benefit guarantee ensures that if the policyholder dies, their beneficiary will receive a predetermined percentage of the original investment, either 75% or 100%.

What is the purpose of the maturity guarantee in segregated funds?

The maturity guarantee protects the investor from losses after a set period, typically 10 or 15 years, by ensuring they receive at least a certain percentage of their original investment back.

What is a 'reset' in the context of segregated funds?

A 'reset' allows the investor to lock in gains at a new principal amount, which also resets the maturity date, providing both growth and protection.

What are the potential benefits of segregated funds for retirees?

Segregated funds can allow retirees to invest in higher-risk investments with the assurance that their principal is protected and can be passed on to beneficiaries without probate.

Why might segregated funds offer creditor protection?

Assigning a beneficiary to a segregated fund can provide protection against lawsuits and other liabilities, as the investment is not personally owned but held within the insurance contract.

What is the main criticism the speaker has about the maturity guarantee in segregated funds?

The speaker criticizes the maturity guarantee as weak because it only ensures a return of the principal amount, which is not beneficial if the investor is not making significant gains over the investment period.

Who might the speaker recommend segregated funds to?

The speaker suggests that segregated funds could be suitable for individuals nearing retirement or those focused on estate planning, especially if they are likely to pass away within the next 5 to 15 years.

Why does the speaker advise against segregated funds for younger individuals?

The speaker recommends against segregated funds for younger individuals due to the higher fees involved and suggests they invest in traditional funds to save on costs.