Are Segregated Funds a Good Investment? An Honest Assessment for Ontario Investors
Your financial advisor recommends segregated funds for your retirement portfolio, highlighting principal guarantees, creditor protection, and probate bypass benefits. The pitch sounds compelling—investment growth with insurance protections unavailable through mutual funds or ETFs. But the management fees run 2.5-3.5% annually, substantially higher than the 0.5-2% you'd pay for comparable mutual funds. For Ontario investors trying to build retirement savings while managing costs, the question "are segregated funds a good investment" demands honest analysis beyond marketing claims and commission-driven recommendations.
Segregated funds occupy a unique position in Canada's investment landscape—insurance contracts that invest in diversified portfolios while providing contractual guarantees protecting principal at maturity or death. For specific investors with particular needs—professionals facing creditor exposure, business owners planning estates, or risk-averse individuals valuing principal protection—these features provide genuine value justifying higher costs. However, for many Ontario residents simply seeking retirement growth, segregated funds' additional fees often outweigh their specialized benefits.
The answer to whether segregated funds are a good investment isn't universal. A Toronto physician with malpractice liability concerns values creditor protection differently than a Mississauga teacher with a defined benefit pension and simple estate. A 60-year-old Ottawa executive approaching retirement appreciates principal guarantees more than a 30-year-old London professional with 35 years until retirement. Understanding whether segregated funds make sense for your situation requires examining their specific benefits, honest cost analysis, comparison with alternatives, and realistic assessment of whether you actually need the unique features these products provide.
Key Takeaways
Segregated funds provide principal guarantees (75-100% at maturity/death), creditor protection, and probate bypass unavailable through traditional investments
Management fees of 2.5-3.5% annually exceed mutual funds by 0.5-1%, creating significant long-term cost differences
For most young Ontario investors with long time horizons, lower-cost mutual funds or ETFs provide better wealth accumulation
Professionals with creditor exposure, complex estates, or significant principal protection needs benefit most from segregated fund features
Investment returns depend on underlying portfolio management, not the segregated fund structure—similar to mutual fund performance
The "good investment" question depends less on the product itself and more on whether you need its specific insurance features
Overview
Segregated funds combine investment management with insurance contract protections, creating hybrid products serving specific needs traditional investments cannot address. This comprehensive guide helps Ontario investors evaluate whether segregated funds are a good investment by examining their unique features, analyzing costs versus benefits, comparing investment performance to alternatives, identifying who benefits most, and providing decision frameworks ensuring your investment choices align with your actual needs rather than sales pressure. Athena Financial Inc. specializes in helping Ontario residents objectively evaluate segregated funds against alternatives, ensuring your investment strategy maximizes wealth accumulation while addressing legitimate protection needs without overpaying for unnecessary features.
Understanding What Makes Segregated Funds Different
Before determining if segregated funds are a good investment, you must understand exactly what distinguishes them from traditional investment vehicles and whether those differences matter for your situation.
The Insurance Contract Structure
Segregated funds are technically insurance contracts, not securities. An insurance company issues the contract, pools investor money, and invests it in professionally managed portfolios similar to mutual funds. The "segregated" name reflects how insurance companies legally separate these assets from general company assets, protecting contract holders if the insurer faces financial difficulties.
Each contract specifies an investment portfolio—Canadian equities, global bonds, balanced funds, or sector-specific investments—with your money growing or declining based on underlying performance just like mutual funds. The critical difference lies in contractual guarantees and protections embedded in the insurance contract that mutual fund investors never receive.
This insurance structure creates the foundation for segregated funds' unique features. Whether these features make segregated funds a good investment depends on whether you need insurance protections alongside investment growth or simply want maximum returns at lowest cost.
Principal Protection Guarantees
Segregated funds guarantee that at contract maturity (typically 10-15 years) or upon death, you or your beneficiaries receive at minimum 75-100% of deposits made, regardless of market performance. If you invest $100,000 with a 75% guarantee and markets crash leaving only $60,000, you're guaranteed at least $75,000 at maturity.
These guarantees only apply if you hold until maturity or die before maturity—early redemption provides current market value without guarantee protection. This timeline limitation means principal protection benefits only investors who can commit funds for the full maturity period, making segregated funds potentially poor investments for anyone needing liquidity within 10 years.
Reset features allow locking in market gains as new guaranteed minimums. If your investment grows to $150,000, resetting protects $112,500-150,000 going forward (depending on guarantee level). Strategic resets progressively secure profits regardless of future volatility, though resets typically restart maturity timelines extending your commitment period.
Creditor Protection Benefits
When you designate family class beneficiaries (spouse, children, parents, grandchildren), Ontario insurance legislation provides creditor protection for segregated funds. If you declare bankruptcy or face legal judgments, properly structured segregated funds remain protected and unavailable to creditors.
This protection mirrors life insurance policy protection and derives from segregated funds' status as insurance contracts rather than investment securities. The same legislation protecting your term life insurance also protects segregated fund contracts with appropriate beneficiary designations.
For Ontario professionals with significant liability exposure—physicians, dentists, lawyers, accountants, business owners—this creditor protection can make segregated funds a good investment despite higher fees. The protection preserves retirement savings even if worst-case liability scenarios materialize, providing value beyond simple investment returns.
Estate Planning Advantages
Segregated funds with designated beneficiaries bypass probate entirely, delivering funds to beneficiaries within 2-4 weeks versus 6-12 months for probated estates. Ontario charges probate fees of approximately 1.4% on estate values over $50,000—roughly $7,000 on a $500,000 estate.
Beyond fee savings, probate bypass provides speed when families need financial support most and privacy protecting family financial details from public record. Traditional investment accounts require probate, creating delays and costs segregated funds completely avoid.
For high-net-worth Ontario residents with substantial estates, these estate planning benefits can justify higher management fees through probate savings and efficient wealth transfer, making segregated funds a good investment within comprehensive estate strategies.
The Cost Analysis: Do Higher Fees Kill Returns?
Honestly evaluating whether segregated funds are a good investment requires confronting their fee structure and calculating long-term impact on wealth accumulation.
Management Expense Ratio Comparison
Segregated fund MERs typically range from 2.5-3.5% annually depending on fund type, guarantee level, and insurance company. Balanced funds might charge 2.7% while specialty equity funds could reach 3.2%. These costs cover investment management, insurance costs for guarantees, administrative expenses, and advisor compensation.
Comparable mutual funds charge 1.5-2.5% for similar investment management, meaning segregated funds cost 0.5-1% more annually. Low-cost index ETFs charge just 0.1-0.5%, making segregated funds 2-3% more expensive than passive alternatives.
This difference compounds dramatically over decades. On $100,000 invested for 25 years at 6% gross returns:
0.25% MER (ETF): $371,000 final value
1.5% MER (mutual fund): $305,000 final value
2.75% MER (segregated fund): $236,000 final value
The segregated fund investor accumulates $135,000 less than the ETF investor and $69,000 less than the mutual fund investor over 25 years—real money sacrificed for guarantee and protection features. Whether segregated funds are a good investment depends entirely on whether those features are worth this substantial cost.
The Declining Benefit Problem
Segregated fund guarantees protect less over time relative to premiums paid. Initially, a 75% guarantee on $100,000 protects $75,000—25% downside protection. But as you pay ongoing MER fees, your "at-risk" capital shrinks while protection remains fixed at the original percentage of deposits.
After 10 years of 2.75% MER fees (roughly $27,500 paid), your $100,000 deposit plus modest growth might total $120,000 in market value. But you've paid $27,500 in fees for protection—the guarantee only matters if markets crash below $75,000 from that point. The insurance you bought for $27,500 protects against increasingly unlikely scenarios as markets generally rise over long periods.
This dynamic makes segregated funds potentially better investments for shorter holding periods approaching maturity when guarantees become more likely to activate, but poorer investments for very long horizons when the probability of benefiting from guarantees decreases while fee costs compound.
Fee Justification Through Features
The critical question: do segregated fund features justify 0.5-1% higher annual costs? For some Ontario investors, absolutely yes. The creditor protection alone might save hundreds of thousands if bankruptcy occurs. Probate savings on large estates return the extra fees paid. Principal guarantees provide peace of mind allowing risk-averse investors to stay invested rather than fleeing to low-return GICs from fear.
For others, definitively no. Young investors with 30-40 years until retirement, minimal creditor concerns, simple estates, and comfort with market volatility gain little from features costing them tens of thousands in foregone returns. The fees represent pure cost without corresponding value, making segregated funds poor investments compared to lower-cost alternatives.
Investment Performance: How Do Returns Actually Compare?
Determining if segregated funds are a good investment requires examining actual investment performance beyond fee structures.
Underlying Portfolio Management Quality
Segregated fund investment returns depend primarily on the quality of underlying portfolio management, not the insurance structure itself. Major Canadian insurance companies employ professional investment managers running segregated fund portfolios—often the same teams managing their mutual fund offerings.
A Canadian equity segregated fund and a Canadian equity mutual fund from the same company with identical holdings will produce similar gross returns. The net return difference comes almost entirely from the MER differential, not inherent performance advantages or disadvantages of the segregated fund structure.
This means evaluating whether segregated funds are a good investment requires examining whether specific fund managers have strong track records, not whether "segregated funds" as a category outperform or underperform. You're buying professional management plus insurance features, with performance driven by management skill and market conditions.
Comparing Apples to Apples
Fair performance comparison requires matching investment strategies. Comparing a conservative segregated fund to an aggressive equity mutual fund produces meaningless conclusions. Compare balanced segregated funds to balanced mutual funds, Canadian equity to Canadian equity, global diversified to global diversified.
When properly compared with MERs considered, segregated funds typically lag comparable mutual funds by roughly their MER differential—if segregated funds charge 0.75% more, they deliver approximately 0.75% less annual return. Over 20-25 years, this difference becomes substantial, making the investment question hinge entirely on whether guarantee and protection features justify the performance drag.
The Guarantee Value Calculation
How much is principal protection worth? If you invest $100,000 in a segregated fund with 75% guarantees versus a mutual fund with no guarantees, you're essentially paying insurance premiums (the MER differential) for downside protection.
Over 25 years, you might pay $15,000-25,000 extra in MER fees for this protection. In exchange, you receive assurance that even if markets crash catastrophically before maturity, you'll recover at least $75,000. For risk-averse investors, this insurance value might exceed the cost. For risk-tolerant investors with long horizons, paying $20,000 in extra fees for protection they're unlikely to need represents poor value.
Who Benefits Most: Ideal Candidates for Segregated Funds
Whether segregated funds are a good investment varies dramatically based on investor circumstances. Certain Ontario residents benefit substantially while others should avoid these products entirely.
High-Net-Worth Individuals With Complex Estates
Wealthy Ontario investors with estates exceeding $1 million benefit from probate bypass and estate planning features. Saving 1.4% in probate fees on a $2 million estate ($28,000) recovers years of extra MER costs. The privacy, speed, and flexible beneficiary designations add further value for complex family situations.
For Toronto and Ottawa professionals with substantial assets, business holdings, or intricate estate distribution plans, segregated funds make good investments within diversified portfolios even if they wouldn't be ideal for the mass market. The estate planning benefits justify costs when estates reach sizes where probate fees, settlement delays, and complexity become significant concerns.
Professionals and Business Owners With Creditor Exposure
Ontario physicians, dentists, lawyers, accountants, architects, engineers, and business owners all face potential liability claims that could exceed insurance coverage. One malpractice judgment or business failure shouldn't devastate retirement savings accumulated over decades.
For these professionals, segregated fund creditor protection provides enormous value. A surgeon with $800,000 in segregated funds doesn't lose retirement security if a single case results in a judgment exceeding malpractice insurance limits. This protection alone can make segregated funds excellent investments for creditor-exposed professionals despite higher fees.
Risk-Averse Investors Approaching Retirement
Investors 55-65 years old with 10-15 years until retirement benefit significantly from principal guarantees. The shorter timeline to potential guarantee activation combined with reduced time to recover from market crashes makes downside protection particularly valuable.
A 60-year-old with $500,000 who cannot afford market losses before retirement might find segregated fund guarantees worth premium costs. The alternative—moving entirely to GICs earning 3-4%—provides complete safety but sacrifices growth potential. Segregated funds allow maintaining equity exposure with downside protection, potentially providing better risk-adjusted returns than ultra-conservative alternatives.
Conservative Investors Who Otherwise Avoid Equities
Some investors are so risk-averse that they'd keep all savings in savings accounts or GICs rather than accept any market risk. For these individuals, segregated funds' principal guarantees might enable equity investing they'd otherwise completely avoid.
If the choice is between a segregated fund earning 4-5% net (after MERs) with guarantees versus GICs earning 3-4% with complete safety, the segregated fund provides better returns with acceptable risk for conservative investors. The relevant comparison isn't segregated funds versus low-cost ETFs (this investor would never buy ETFs), but segregated funds versus guaranteed investments offering lower returns.
Who Should Avoid Segregated Funds
Equally important to understanding who benefits is recognizing who should avoid segregated funds despite marketing pressure.
Young Investors With Long Time Horizons
Investors in their 20s, 30s, and even 40s with 25-40 years until retirement rarely benefit from segregated fund features enough to justify costs. The long timeline allows recovering from market crashes, making principal guarantees less valuable. Creditor exposure is typically minimal early in careers before substantial liability accumulates. Estate planning needs are simpler before wealth accumulates.
For young Ontario professionals, low-cost ETFs or mutual funds held in RRSPs and TFSAs provide dramatically better wealth accumulation than segregated funds. The 1-2% annual savings compound over decades into hundreds of thousands of additional retirement wealth—money better spent on lifestyle, children's education, or earlier retirement than on insurance features you're unlikely to need.
Cost-Conscious Investors Prioritizing Wealth Maximization
Investors whose primary goal is maximizing retirement wealth at lowest cost should avoid segregated funds. DIY investors comfortable managing portfolios using index ETFs with 0.1-0.5% MERs achieve far superior long-term returns than segregated funds charging 2.5-3.5%.
The difference between 0.25% and 2.75% MERs on a $500,000 portfolio over 25 years exceeds $300,000. If you don't specifically need creditor protection, estate planning features, or principal guarantees, this cost represents pure waste making segregated funds objectively bad investments for fee-minimizing investors.
Investors With Simple Estates
If you have straightforward estates—spouse and children as sole beneficiaries, no creditor concerns, modest asset levels—segregated funds' estate planning benefits provide minimal value. Standard mutual funds or ETFs in RRSPs and TFSAs with proper beneficiary designations achieve similar probate bypass at far lower cost.
For Kitchener families or Hamilton homeowners with uncomplicated financial situations, paying premium fees for estate planning features you don't need makes segregated funds poor investments compared to conventional alternatives serving your needs adequately.
Short-Term Investment Goals
Segregated fund guarantees only apply at maturity (10-15 years) or death. If you need money within 10 years for down payments, education funding, or other goals, you receive current market value without protection—making the guarantees worthless while the extra fees still apply.
For any goal timeline under 10 years, segregated funds are objectively bad investments. The fees reduce returns while guarantees provide no benefit during your actual investment horizon. Better to use appropriate-term GICs, high-interest savings accounts, or short-term bond funds matching your timeline at lower cost.
Comparing Segregated Funds to Investment Alternatives
Whether segregated funds are a good investment becomes clearer when compared directly to alternatives serving similar purposes.
Segregated Funds vs. Mutual Funds
Both invest in professionally managed diversified portfolios. Both offer various investment strategies and risk levels. The key differences: segregated funds add 0.5-1% annual cost for guarantees and creditor protection; mutual funds provide no guarantees or special protections but cost less.
For investors not needing guarantees or creditor protection, mutual funds are superior investments providing similar returns at lower cost. For investors specifically requiring those features, segregated funds justify their premium through added value mutual funds cannot deliver.
Segregated Funds vs. ETFs
ETFs provide even more dramatic cost savings—typically 0.1-0.5% MERs versus 2.5-3.5% for segregated funds. A 2-3% annual cost difference compounds into massive wealth differences over decades, making ETFs far superior investments for cost-conscious, long-term investors comfortable with market volatility.
However, ETFs provide no guarantees, no creditor protection, and no specialized estate planning features. The comparison isn't whether ETFs deliver better returns (they do), but whether segregated fund features justify paying substantially more for equivalent market exposure.
Segregated Funds vs. GICs for Conservative Investors
For conservative investors, the relevant comparison might be segregated funds versus GICs. GICs offer 100% principal protection with guaranteed returns (currently 3-5%), complete safety, and CDIC insurance backing.
Segregated funds provide only 75-100% protection at maturity, not continuous safety, while charging ongoing fees. However, they offer equity exposure with growth potential GICs lack. If markets perform well, segregated funds might deliver 5-7% returns versus 4% GIC returns, making them potentially good investments for conservatives wanting some growth with downside protection.
Building Portfolios With Mixed Approaches
Many Ontario investors benefit from combining approaches—perhaps holding core retirement savings in low-cost ETFs or mutual funds while using segregated funds strategically for amounts requiring creditor protection or estate planning features.
A Toronto professional might hold $600,000 in RRSP/TFSA ETFs at 0.25% MER plus $200,000 in non-registered segregated funds at 2.75% MER. The blended cost is roughly 0.90%—far better than 2.75% on everything. This strategic approach captures segregated fund benefits where needed while minimizing overall portfolio costs, potentially making segregated funds good investments in moderation but poor choices for 100% of your portfolio.
Making Your Decision: Is It Good for You?
Determining whether segregated funds are a good investment for your specific situation requires systematic analysis of your needs, alternatives, and priorities.
Questions to Ask Before Investing
Do you have creditor exposure justifying protection? If you're a professional with malpractice risk, business owner with liability exposure, or anyone facing potential creditor claims, segregated fund protection provides genuine value. If you're an employee without unusual liability concerns, you're paying for features you don't need.
Is your estate complex enough to benefit from probate bypass? If your estate exceeds $500,000-1,000,000 with complex distribution needs, probate savings and estate planning features justify costs. If your estate is modest with simple beneficiary needs, you're overpaying for unnecessary features.
Do you genuinely value principal protection guarantees? If market volatility causes anxiety preventing you from staying invested, guarantees enabling equity exposure you'd otherwise avoid provide value. If you're comfortable with market risk, you're paying for insurance you don't psychologically need.
Have you compared actual costs across alternatives? Don't assume segregated funds cost more—sometimes they're competitive. Get actual quotes comparing segregated funds, mutual funds, and ETF portfolios. Calculate long-term cost differences to make informed decisions.
What's your investment timeline? Under 10 years, segregated funds provide poor value since guarantees don't apply before maturity. Over 20-30 years, the compounding fee difference likely outweighs benefits for most investors. The 10-20 year window offers the best value proposition where benefits potentially justify costs.
Red Flags Suggesting They're Not Right for You
Certain situations clearly indicate segregated funds aren't good investments:
You're under 40 with 25+ years until retirement
Your estate is simple and under $500,000
You have no creditor exposure concerns
You're comfortable with market volatility
You're a cost-conscious investor prioritizing fees
You need money within 10 years
You already have adequate protection through RRSPs/TFSAs
If multiple red flags apply, segregated funds almost certainly aren't good investments for your situation compared to lower-cost alternatives.
Getting Objective Advice
Advisors selling segregated funds earn commissions—their recommendations may not be in your best interest. Seek advice from fee-only financial planners who don't earn commissions on product sales, ensuring objective analysis based on your needs rather than their compensation.
For Ontario residents seeking unbiased evaluation of whether segregated funds are a good investment for their specific circumstances, Athena Financial Inc. provides comprehensive analysis comparing all investment options without commission bias. Our advisors help you understand exactly which features of segregated funds apply to your situation, honestly assess whether those benefits justify higher costs, and recommend optimal investment strategies maximizing wealth while addressing legitimate protection needs. We work with investors throughout Ontario—Toronto, Ottawa, Mississauga, Hamilton, London, and communities across the province—ensuring your investment decisions serve your financial goals rather than generating sales commissions. Contact Athena Financial Inc. today at +1 604-618-7365 to discuss your investment objectives and discover whether segregated funds make sense for your portfolio or if better alternatives exist delivering superior value for your unique situation.
Conclusion
Whether segregated funds are a good investment depends far less on the product itself and far more on whether you specifically need the unique features these insurance-based investments provide. For Ontario professionals with creditor exposure, high-net-worth individuals with complex estates, or risk-averse investors approaching retirement who highly value principal protection, segregated funds represent excellent investments despite higher fees. The guarantees, creditor protection, and estate planning benefits provide genuine value justifying 0.5-1% additional annual costs when those features address real needs in your financial situation.
However, for the majority of Ontario investors—young professionals with long time horizons, cost-conscious savers prioritizing wealth maximization, those with simple estates and minimal creditor concerns—segregated funds are objectively poor investments. The higher management fees compound over decades into hundreds of thousands of dollars in foregone wealth, sacrificed to pay for insurance features you're unlikely to benefit from or genuinely need.
The key to making the right decision lies in honest self-assessment. Don't purchase segregated funds because an advisor recommends them or because the guarantees sound appealing in isolation. Compare actual costs over your investment timeline. Evaluate whether you truly need creditor protection, estate planning features, or principal guarantees enough to justify paying substantially more than lower-cost alternatives. Consider whether your circumstances place you in the minority who benefit or the majority who'd be better served by mutual funds or ETFs. Make your investment choices based on your genuine needs and priorities rather than marketing claims or commission-driven sales pressure, ensuring your portfolio maximizes wealth accumulation while addressing legitimate protection requirements without overpaying for features that sound good but provide little actual value for your specific situation.
FAQs
Q: Are segregated funds better than mutual funds for retirement savings?
A: "Better" depends on your priorities. Segregated funds provide guarantees and protection features mutual funds lack but cost 0.5-1% more annually. For most young investors maximizing retirement savings, mutual funds or ETFs provide superior wealth accumulation through lower fees. For professionals with creditor exposure, complex estates, or investors highly valuing principal protection approaching retirement, segregated funds can be better investments despite higher costs. The relevant question isn't which product is universally superior but which serves your specific needs and circumstances better.
Q: Can I lose money with segregated funds?
A: Yes, you can lose money before maturity. Segregated funds fluctuate with markets—if markets decline, your account value drops. The guarantees (75-100% of deposits) only apply at contract maturity (typically 10-15 years) or death. If you need money before maturity, you receive current market value which could be less than you invested. During the 2008 financial crisis, many segregated fund investors saw account values drop 30-40% despite having guarantees—those who held to maturity received guaranteed minimums, but those who redeemed early suffered losses without guarantee protection.
Q: Are the guarantees worth the extra fees?
A: This depends on the probability you'll benefit from guarantees and how much you value that protection. If markets perform reasonably well—growing 5-7% annually—guarantees never activate while you pay extra fees continuously. Over 25 years in normal markets, you might pay $20,000-30,000 in extra MER costs for protection you never needed. However, if markets crash severely before your maturity date, guarantees could protect tens of thousands in principal. Risk-averse investors approaching retirement might find this insurance worth the cost; young investors with long horizons unlikely to benefit probably don't.
Q: Do segregated funds perform better or worse than the stock market?
A: Segregated fund performance depends on their underlying investments and management quality, not the insurance structure. A Canadian equity segregated fund should roughly match Canadian equity market returns minus fees. The insurance features don't improve or harm investment performance—they add costs and protections without affecting the portfolio's market returns. If Canadian stocks return 7% annually and your segregated fund charges 2.75% MER, you'd net roughly 4.25%—the market return minus costs. Compare this to an index ETF tracking the same market at 0.25% MER netting 6.75%, and you see how fee differences impact returns regardless of guarantee features.
Q: Are segregated funds a good investment in RRSPs or TFSAs?
A: Segregated funds work within RRSPs and TFSAs, but their value proposition weakens in registered accounts. RRSPs and TFSAs already provide some creditor protection under bankruptcy legislation, reducing segregated funds' incremental protection value. Additionally, RRSPs and TFSAs offer beneficiary designation for probate bypass similar to segregated funds. The main remaining benefit in registered accounts is the maturity/death guarantees, which might not justify the 1-2% extra fees for most investors. Segregated funds generally make more sense in non-registered accounts where creditor protection and estate planning benefits aren't available through account structure alone.
Q: What if I need my money before the maturity date?
A: You can redeem segregated funds anytime at current market value, but doing so forfeits the maturity guarantee completely. If you invested $100,000 with 75% guarantees and need money after 7 years when markets have declined to $85,000, you receive $85,000—the guarantee doesn't apply. Only holding until the specified maturity date or dying before maturity triggers guarantee protection. This makes segregated funds potentially poor investments for anyone who might need liquidity before maturity, as they pay premium fees for guarantees they'll never receive while giving up the flexibility lower-cost investments provide.
Q: Are segregated funds good for protecting retirement savings close to retirement?
A: Yes, segregated funds can be excellent investments for pre-retirees 55-65 with 10-15 years until retirement needing equity exposure but wanting downside protection. The shorter timeline increases the probability guarantees might activate if markets crash, making the insurance more valuable. Additionally, you lack time to recover from major market losses before needing retirement income. The trade-off between higher fees and downside protection becomes more favorable as retirement approaches. However, once retired, the value proposition weakens—retirees might be better shifting to conservative portfolios, GICs, or annuities providing income rather than maintaining expensive segregated fund growth strategies.
Q: Can I switch between different segregated funds without losing guarantees?
A: This depends on your contract terms. Many insurance companies allow switches between their segregated fund offerings while preserving your original maturity date and guarantee structure, though switches trigger capital gains tax in non-registered accounts. Some contracts reset maturity timelines upon switches or charge switching fees. Review your specific contract's switching provisions before making changes. Generally, staying within the same insurance company's fund family maintains guarantees better than moving between companies, which typically requires surrendering your contract and purchasing new coverage at your current age and health status.
Q: Are segregated funds good investments for business owners?
A: Segregated funds can be excellent investments for Ontario business owners and incorporated professionals due to creditor protection benefits. Business failures, partnership disputes, or corporate liabilities that might trigger personal exposure don't necessarily compromise segregated fund holdings with proper beneficiary designations. Additionally, segregated funds held corporately can be structured for tax-efficient wealth accumulation and estate distribution. The creditor protection alone often justifies higher fees for business owners facing substantially greater liability exposure than employees. However, business owners should also consider corporate investment accounts, holding companies, and other structures potentially providing similar benefits at lower ongoing costs.
Q: What happens to my segregated funds if the insurance company fails?
A: Segregated fund assets are legally separated from the insurance company's general assets—they're "segregated" specifically for contract holders. If the insurer becomes insolvent, segregated fund assets remain protected. Additionally, Assuris (Canada's life insurance protection agency) provides backup coverage up to $100,000 or 85% of guaranteed values, whichever is higher. To maximize protection, consider diversifying large segregated fund holdings across multiple highly-rated insurance companies. Check insurer financial strength ratings (A or higher from A.M. Best or S&P indicates strong financial positions) before purchasing. While insurance company failures are rare in Canada, diversification ensures comprehensive protection.