Stats show the insurance-linked products are gaining popularity in Canada but not without attracting some controversy.
“From my perspective if I look at the mathematical probability of losing money over a 10-year period in various different asset classes is pretty low,” says Nova Scotia advisor Glen Rankin. “You’re paying a lot of money for insurance you’re likely to never to use.”
Overall net assets in segregated funds reached $113.1-billion as of March, 2015, compared with $104.3-billion the previous March, according to a monthly Insurance Service Advisory report by Investor Economics.
As well in March, the $243-million in segregated funds net sales was the highest monthly tally since February 2012, according to a recent report by Desjardins Securities.
Rankin’s analysis echoes that of a large number of IIROC and MFDA players concerned insurance and dual licensed players are ramping up sales efforts with unnecessary attention to the safe harbour segs provide.
That’s not to say those insurance-based funds are unsuitable for all clients. Business owners, for example, find the additional creditor protection reassuring.
“[There’s] An extra layer of creditor protection due to The Life Insurance Act,” Rankin suggests. “Even though RRSPs, etc. do have some creditor protection, they may be vulnerable to some types of claims. This is especially concerning for business owners.”
But that’s not the only situation where seg funds do make sense over mutual funds suggests B.C. dual-licensed advisor Lyle Konner.
“If someone is terminally ill. The segs offer the death benefit guarantee that MFs do not,” says Konner. “So if they die in a market downturn the money is preserved for family.”
“A couple in retirement – if one dies the value is again protected for the survivor.”
The third and final example is for general estate planning, according to the BC advisor.
“Adopting the concept of not having all your eggs in one basket approach,” says Konner. “It’s good to diversify to keep your options open.”
While both Rankin and Konner provide situations where seg funds make sense, the biggest reason clients might be interested at this point in the bull market is to ensure that they don’t lose out on profits should we experience another massive correction like what happened in 2008.
“Some people will use seg funds as an excuse to be way too aggressive with the investment strategy,” says Rankin. “They’ll use all equities and guarantees. A lot of the insurance companies now won’t guarantee if you’re all equities. So, they’ve come down so you can only have maximum 70 per cent equities. Well, if you look over a long period of time the chances of losing money with 60 or 70 per cent equities is very low.”