Q: We have $320,000 in a balanced portfolio in a LIRA. Our insurance agent wants us to transfer this money to segregated funds. I don’t think this is a wise move for us as we are close to retirement age. Am I right? And when do segregated funds make sense?
A: You are right to be skeptical. Few unbiased financial planners would recommend segregated funds under any circumstances. In almost all cases, they only make sense for the agents who collect fat commission for selling them.
A “seg fund” is not actually a mutual fund: it’s an insurance product. That’s why they are often recommend by insurance advisors, who are often not licensed to sell other types of investments. If all you sell is hammers, every problem looks like a nail.
Seg funds come with a number of benefits that sound appealing. First, they have a maturity guarantee, which sets a minimum value for the fund after a specified period (often 10 years). In other words, if you invest your $320,000 in a seg fund with a 100% guarantee, you’d have assurance that it will be worth at least $320,000 at maturity, even if markets tank.
The funds also have a life insurance component, so if you pass away and your fund has declined in value, you’ll receive a payment that makes you whole again. Moreover, because they’re insurance products, seg funds are protected from your creditors if you declare bankruptcy. They can also be used to pass assets directly to your beneficiaries when you die, thereby avoiding probate fees.
The problem is that these benefits come at an extremely high price: many seg funds have fees well over 3% annually. When you consider what you’re getting, it’s simply not good value. Consider the maturity guarantee: the odds of a balanced portfolio showing a significantly negative return after 10 years is very low and not worth insuring. All of the other benefits of seg funds can be obtained in other, much cheaper ways, too.
—Dan Bortolotti, CFP, CIM, associate portfolio manager with PWL Capital in Toronto
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