This week I'm joined by Mark McGrath as we dig into segregated funds. These investment vehicles blend mutual funds with insurance and offer unique guarantees but….. the benefits to investors are less clear.
We delve into fees, performance, guarantees and other pros and cons.
We also examine the human side, critiquing sales practices and exploring seg funds in estate planning.
Whether you're a seasoned investor or just starting out, this episode provides essential guidance for informed decision-making in the Canadian investment landscape.
--
TAX CHANGES: Budget 2024
XEQT vs VEQT. Which ETF is better?
Add some STRESS to your retirement plan
Connect With Evan
This week I'm joined by Mark McGrath as we dig into segregated funds. These investment vehicles blend mutual funds with insurance and offer unique guarantees but….. the benefits to investors are less clear.
We delve into fees, performance, guarantees and other pros and cons.
We also examine the human side, critiquing sales practices and exploring seg funds in estate planning.
Whether you're a seasoned investor or just starting out, this episode provides essential guidance for informed decision-making in the Canadian investment landscape.
--
TAX CHANGES: Budget 2024
XEQT vs VEQT. Which ETF is better?
Add some STRESS to your retirement plan
Connect With Evan
Hello and welcome back to the Canadian Money Roadmap Podcast. I'm your host, Evan Neufeld. On today's episode, I'm joined by audience favorite Mark McGrath. Mark has done a lot of research recently on an investment product that you might not be familiar with, but we think you should have more information on. The product is called a segregated fund or a seg fund, and in this episode we really get into the details on some of the benefits, but also the costs and some of the pitfalls with using a product like this. So I hope you enjoy this episode with Mark McGrath. So I hope you enjoy this episode with Mark McGrath.
Speaker 1:All right, today I'm joined by Mark McGrath. Mark is a financial planner and associate portfolio manager at PWL Capital, and today we're going to be talking about an investment product that rarely sees much discussion in the Canadian personal finance community on Twitter, on Reddit, whatever, on public discourse in the news, whatever but there's about $130 billion, Mark told me before we recorded in these financial products. They're often misunderstood and missold to Canadians, perhaps for a variety of reasons which I'm sure we'll get into, but they are a tool right, and it does have some place in the spectrum of financial products here in Canada. So, Mark, I'm hoping you can shed some light today on segregated funds, or what we just call seg funds.
Speaker 2:Yes, yes, hopefully I can shed some light on them.
Speaker 2:They're incredibly complex, more so than I actually realized when I started digging into them.
Speaker 2:And this all came about because I spoke about them just at a very high level on another podcast, on the Rational Reminder podcast, which is, of course, a PWL podcast, and I just was doing a little bit of research into them so that I could speak about them on the podcast.
Speaker 2:And then afterwards I was like, oh, I've got these notes kind of written up, like maybe I should do a kind of longer form blog post or some kind of writing on it. And as I started digging more and more into it, it became more and more complex and I kept coming up with additional like scenarios and questions, and so I just kind of kept researching and writing and what I've got here is basically a draft of like a 5,000 word piece and that just largely explains, kind of how they work right. So, yeah, I think today what we'll do is we'll talk a little bit about what they are, how they work, some of the benefits, some of the drawbacks, when they might be appropriate, when they not might not be appropriate, and potentially some alternatives to seg funds that can accomplish the some of the same things.
Speaker 1:Perfect, let's get started right at the top there. What are these things?
Speaker 2:Yeah, what is a segregated fund? So they go by a bunch of different names and they're largely interchangeable. They are also called GIFs, which is guaranteed income funds, variable annuities, but I think in most cases we know them as seg funds or segregated funds, and essentially what they are is if you took a mutual fund, a traditional mutual fund, and you smashed it together with an insurance contract, you end up with a segregated fund and so, like a mutual fund, it's an investment in that it's generally a portfolio of some kind of underlying holdings, whether those are stocks or bonds or money market funds and there's a ton of variety in what you can buy, just like mutual funds. So you could buy a US large cap growth fund or you can buy a money market fund or a global balance fund or anything in between. So there's the underlying investment component, which very much feels like a mutual fund, and then you smash it together with an insurance contract which provides certain guarantees and acts like life insurance in some ways. So at the start, on the surface, that's essentially what they are.
Speaker 1:Okay, so what type of insurance is being provided here? Is it like, well, this stuff never goes down I see the word guarantee and the title there. What's guaranteed and how do those those, uh, the insurance component actually work with the product?
Speaker 2:Yeah, so that that's the primary selling point of segregated funds is the, the guarantees that are associated with them, and so traditionally, it was more common to see something like a 10 year guarantee, and what that means is that when you invest in one of these things, your capital is protected over a certain time horizon, right?
Speaker 2:So historically, I think the most common time horizon was 10 years, and so if you were to buy, let's just say, a global equity portfolio of some kind, a segregated fund that invests in, say, global stocks, what you would get is a 10 year guarantee where, at the end of those 10 years, if the value of the portfolio was lower than either your starting point if it was a hundred percent guarantee, or, also common was a 75% guarantee meaning if it was lower than like if you put in a hundred thousand dollars and it dropped below $75,000 at the end of that period they would top you up back to either 75% of the value of your original investment or 100% of the value of your original investment, depending on the specific series of seg fund that you purchased. So that's kind of how the guarantee works.
Speaker 1:And that's at the end of the period only, not at any time in that 10-year period in this case. I'm sure there are other products that have different guarantee periods.
Speaker 2:Yeah, so so you're. So you're right, you're still going to experience the volatility of the underlying portfolio, right? Um, so if you're a very conservative investor, you're still going to have to deal emotionally and psychologically with potentially large drawdowns in the value, knowing, of course, that there is some potential guarantee if that value remains depressed at the end of this holding period. I mentioned it was more common to see 10-year guarantees in the past. From my research, those have largely gone away. There are still. I found, one or two companies that do still offer 10-year guarantees. It's much more common these days to see a 15-year guarantee as the minimum, and some companies have done away with those short-term guarantees altogether. And now the contract has a maturity date sometime after age 100. So even if you bought these things at age 40, the maturity time horizon that guarantee might not actually be valid until you're a hundred or 105, or in one case it was 106. Now there is a death benefit guarantee as well. So if you were to pass it before, then were just going to get into this.
Speaker 1:yeah, the maturity guarantee is beyond one statistical life expectancy by perhaps two decades multiple standard deviations outside of that right.
Speaker 2:Yeah, um, so that's generally how they work with the maturity guarantee these days. Now, of course, as I mentioned, there are still some companies that are offering 10-year guarantees. It's more common to see 15-year guarantees okay.
Speaker 1:So if these guarantees on the, the, the short term or the maturity used to be 10, some are 15, some are outrageously longer than than that, how does the death benefit work? In conjunction to that? Are the guarantees different? I recall seeing like 75-75, 100-100, 100-75, whatever. Are those combinations still in place and maybe you could explain that for people that aren't understanding my random number generation here.
Speaker 2:Yeah for sure. So when you buy a segregated fund, there's two guarantees. There's the maturity guarantee, which is what we just described. So that maturity guarantee kicks in after some amount of time 10 years, 15 years or potentially out to age 100. The other guarantee is the death benefit guarantee. So if you were to pass away while owning a seg fund, regardless of whether you have met that time horizon that's required for the maturity guarantee, the death benefit guarantee can pay out. If you bought a seg fund today, the market drops tomorrow, you die on day three, the death benefit guarantee pays out To your point that 75 slash 100, when you see a seg fund advertised, they're going to have different series of funds so you can buy.
Speaker 2:Let's just pick one. You've got a global balance portfolio. There's going to be multiple iterations of that portfolio that you can purchase, depending on what guarantees you want. So you could buy a 75-75, meaning after that maturity timeline, 75% of your capital is protected and on death, 75% of the capital is protected. You also find 75-100 seg funds and you find 100-100. And, of course, the more robust the guarantee, the more expensive the fund's going to be. Obviously, from the insurance company's standpoint, that makes a lot of sense, there's a higher probability they're going to have to pay out. So the ones with the I guess stronger guarantees are going to be a lot more expensive when it comes to and we'll talk about this the MERs, the management expense ratio. So the annual fee that you're paying to own these things gets pretty expensive.
Speaker 1:Let's talk about the likelihood of a fund being down 25% after 15 years. Do you have any data on that? On index, I know products are one thing and indexes are another thing available for seg funds, it was harder to track down pure equity versions. There was a. It's much more common to have a balanced um with you know some bonds in there, maybe 80, 20, maybe 60, 40 um. Is that still the case and, if so, how often is a balanced fund down after 15 year?
Speaker 2:period. Yeah, so I, I I do have some insights into that. Um, um, I will say to your first point, it is it is relatively common to find like a hundred percent equity seg funds. Um, now, these are only offered by insurance companies, right? So you have to buy them through an insurance company and they have to be bought through a licensed insurance agent. And I mentioned this because I didn't go through every single fund on offer by every single insurance company.
Speaker 1:What are we doing here, Mark?
Speaker 2:Outside of manually looking at every single fund. It's just not that easy to get access to all of this.
Speaker 1:The reason I'm teasing Mark here is because there's thousands of these things?
Speaker 2:Yeah, of course.
Speaker 1:It's unrealistic to know the ins and outs of everyone.
Speaker 2:But I will say I did sort them by asset allocation and you can absolutely find a hundred percent equity based um uh, seg funds, so I don't think that that uncommon. Now, how much money is in those specific products I'm not sure about, but they are definitely on on offer. Now to your second question. Uh, I was looking for data on this and my friend, jason Watt, who some of your listeners might know, he's got his own podcast. He's a walking encyclopedia of financial planning knowledge, so he's often one of the first people I go to when I have a question about this kind of stuff. Of course, he's already done this work and so he sent me this awesome spreadsheet. And so what he found is and now he was just using Canadian index data.
Speaker 2:So he looked at a portfolio that was going to be. He basically looked at the TSX total return index, which is the performance of the Canadian stock market, including dividends, over time, and what he tried to do was isolate rolling 10 year periods where these guarantees would have paid out. So if you bought it and you had a 75% guarantee, how many times historically had the Canadian stock market been down more than 25% over a 10 year period, such that this guarantee would have actually paid out In that case? The answer is zero. Oh, perfect, there are zero historical periods. The lowest return that he found over a 10-year period was positive 4.03%. Oh my goodness.
Speaker 1:This is a good news. Bad news story right.
Speaker 2:Yeah, exactly Now we're talking about historical data, of course, yes, and we're only talking about the index. So that would be before fees and taxes and everything else. But statistically speaking, looking backwards, the probability that a 75% guarantee is ever going to pay out historically was zero, right Going forward we don't know of, obviously, like, had you had you timed things, if you bought us equities and happened to buy them in a you know going into, like where the 10-year guarantee came up right at the bottom of the nasdaq crash in the 2000s, like sure that probably paid out.
Speaker 1:But using just canadian index data, um, it was basically zero so then also the 100 hundred percent would also, if I'm understanding correctly, if the lowest period of time was was plus four, then even if you had a hundred percent guaranteed, there's been no historical instance where that would have paid out, correct, yes?
Speaker 2:Gotcha. So again, it probably looks different if you use different countries returns or if you use different asset classes, but interestingly enough, in the Canadian market that's never happened. Okay, the periods where they will pay out is where that death benefit kicks in. So, as I mentioned, there's no minimum holding period for the death benefit. So how do you purchase a segregated fund and then died? Within six months, there was a reasonable probability that the death benefit would have paid out right now. That's just.
Speaker 2:I don't know if you want to call it lucky or unlucky, but if you bought the seg fund, the market crashed and you died within short order, then obviously that death benefit is going to pay out. But the longer you're holding period, the lower the probability that that guarantee is actually going to be of any value. And of course, the problem is you don't know when you're going to pass away. Secondly, most of these seg fund companies have age limits past which you can't really buy them for these guarantees. So it's not like you can be 94 years old and buy one of these things with the expectation that you're going to pass away. Usually they're capped at either age 80 or age 90, depending on the fund company and, of course, again from the insurance company. It totally makes sense because the probability of you dying is very high when you're in your 90s. They're not going to offer these 100% maturity guarantees to somebody on their deathbed at old age, right.
Speaker 1:Right, they're a stats-based business, right. Their whole thing is numbers, right? So if the odds of them losing money on this is known at the outset, the product won't exist.
Speaker 2:Well, that's just it, right. And their actuaries, I think, are a lot smarter than the average retail investor who's being sold these things, so you're not going to beat them on the math or the probabilities, right?
Speaker 1:Right, yeah, You'll beat them on chance probably. Okay, you mentioned cost and you had a great tweet that I'm sure ruffled some feathers in the insurance community. But as far as cost goes, my memory of SIG products again, the insurance doesn't come for free and the investment product doesn't come for free. Mutual funds get a general bad rap in this country for high fees in general. So what kind of fees are we looking at for segregated funds?
Speaker 2:Yeah, they're expensive, right, you're going to pay for those guarantees. And again to your point, these are just a tool and, like any tool, there are cases where they might make sense but they can be misused, and so my argument is largely that I think they're oversold and misused in a lot of cases. I don't want to come out here and say they're a bad product because they're not. They're a product, right, like anything, they can be used appropriately. Now to answer your question about the fees, this comes from a Morningstar report. It's a couple years old.
Speaker 2:But if we talk just about mutual funds and we're specifically talking about actively managed mutual funds and these generally carry high fees, right, you're paying a portfolio manager to essentially try to beat a benchmark on a risk adjusted basis, and those portfolio managers need to get paid, so you're usually going to pay more for your typically active managed mutual fund portfolio. A fund like that for a balanced fund in Canada is 2.3%. That includes advisory fees, right, there's lots of different fee structures but all in somebody going into the branch and buying a standard balance mutual fund, the average fee is 2.3%. The average seg fund with a 75% guarantee was 2.92% and the average seg fund cost for a 100% guarantee was 3.27%. That's very expensive.
Speaker 1:That's crazy, so 3.2. And so sorry. Was that an equivalent asset allocation? Was that like that's right? Yeah, oh, jeepers, Okay. I suspect equities more like.
Speaker 2:Definitely yeah Like if you look at the, the really conservative end of the spectrum, the fees are actually quite reasonable. You can get money market funds in the 0.5% range. Of course, the guarantees are a lot less useful for a guaranteed money market fund because you're essentially not taking on any market risk, so the guarantees are perhaps less useful, if at all, but consequently the fees are significantly lower. So, to your point, fees get more expensive for more aggressive portfolios, so more geared towards stocks, they get more expensive for global stocks and they get more expensive for higher guarantees. I think that the most expensive one I saw was around 3.4%, somewhere in that range. But again, I didn't do an exhaustive search for every single seg fund in the marketplace, so they, they. I'm sure there's some that are higher than that.
Speaker 1:Gotcha. So I uh I deviated from my own original point there, but your tweet that you mentioned talking about the fees on seg fund products um, because fees, at the end of the day, they reduce the return that you can receive as as the end investor, and so if the fees are high enough, it actually increases the odds that the insurance portion of the contract will actually pay out, which is kind of hilarious.
Speaker 2:Yeah, it's this sort of snake eating its tail type situation where the reason you might need those guarantees on a seg fund is because the fees are so high that the probability of you underperforming is are so high that the probability of you underperforming is increased so significantly that the guarantees might be useful. Right, like when we looked at the Canadian index data earlier, the worst 10 year returning, rolling 10 year returning period in Canada was just over 4%. But if you take the average seg fund fee, which is called 3% now, the best performing 10 year period was 1% net of fees. Right, and so you're, you're slicing away at the margins in with these, with these products, and, to your point, the probability of you needing the guarantees goes up simply as a function of the high fees that these things charge.
Speaker 1:Okay, so okay, assuming this product is not paying out, on the guarantee, on the, on the, on the maturity guarantee death again, it's a. To borrow a line from my colleague uh shares a wall with me here. He says you tell me when you're going to die and I'll tell you exactly the products to buy. Um, and we don't. So anyways, let's just talk about the maturity there, um, so if that is very unlikely to happen, what then happens with these funds? Can you withdraw from them? The same way? Can you turn them into if they're in RSPs? Do you turn them into RIFs the same way? All that kind of stuff. How do the guarantees change if you're withdrawing from them on a regular basis? I'm asking too many questions here, but pretty standard, comparable to mutual funds there.
Speaker 2:Yeah for sure. So they are. Generally. They're liquid, so you can withdraw from them at any time. When you withdraw from them, you do reduce the guaranteed amount, of course, right Like you're not going to. If you put in a hundred thousand, and it's a hundred percent guarantee, you're protected for a hundred thousand dollars. If you withdraw 50,000, you're obviously no longer protected for a100,000. You're going to be protected for, say, $50,000. There's actually multiple ways that insurance companies can calculate how they reduce the maturity benefits and death benefits when you make a withdrawal. I'm not going to go through all the math and the different ways of calculating that, but I think the takeaway is that anytime you withdraw from a seg fund contract, it's going to to in some way proportionally reduce the guarantees associated with that contract.
Speaker 2:But they are, they are liquid, so you can, you can access them if you need them. You can hold them in rsps. You would convert your rsp into a riff and you could hold seg funds in a riff account as well. So, outside of some of the guarantees and some of the other situations that we'll get into, they largely would largely would operate like a mutual fund. From that perspective, there's one feature that's sold that on the surface sounds really good, but if you think about it for a couple minutes it's kind of just I don't want to say lipstick on a pig, that might be a little bit too severe, but if you think about it for a few minutes it's not really that much of a benefit. So what you can do is, on the anniversary date you can reset the value and the guarantee value of a seg fund. In most cases, right.
Speaker 2:Each seg fund contract is going to have different features and benefits. So let's say you've got a 15 year guarantee for $100,000. The portfolio goes up to $105,000. On the following anniversary date you can lock in that $105,000 for the purpose of the guarantee. Now that sounds good. It's like you're crystallizing your gains and now you can't lose more than $105,000 instead of $100,000.
Speaker 2:But by doing so you also extend the maturity guarantee again from the original sort of period back out to say 15 years. So if you did this in year 10, you've only got five years left on that guarantee. You reset the guarantee, lock in your capital gains. You're now kicking out the maturity date another 15 years from the time. And that doesn't sound so bad when you read it from a piece of sales literature.
Speaker 2:But when you think about it, if we look at 15-year periods or 10-year periods, where the probability of these guarantees is basically nil, it's no different than withdrawing your money from the product and reinvesting it right Like there's not. You're locking in your gains but by kicking out the maturity guarantee, like over any 15-year period, the probability of needing the guarantee is going to be really, really low. So if you have to kick out the 15 year period again, you're again subject to this situation where the probability that it's going to go from 100 to 105 000 and then over the next 15 years drop below, you know, 75 or 100 of that original value is very, very, very small yeah, the, the odds remain the same regardless of the starting amount.
Speaker 1:Yeah, exactly Interesting. So the reset period is also kind of negligible there. Again, the reset period is probably still worth doing. If you're in this product because of the unknown death benefit guarantee, I guess that would probably be the best case to be made for that. Would that be, am I?
Speaker 2:thinking about that correctly yeah. Yeah, yeah, for sure, right, because I mean, if you're resetting the now, you also can't reset them past a certain age, to prevent exactly what you just described. Sure, depending on the contract, depending on the insurance company, it's usually between age 80 and age 90. So up until that date you have the option to annually reset the value, but past that age you can no longer avail yourself of those resets because, as we talked about, that's just too much risk to the insurance company.
Speaker 1:Yeah, okay, so at a high level, I think we probably covered off what are seg funds. Let's maybe get into some of the other benefits. We talked about the guarantees. These things have a little bit of a different structure, potentially for non-registered funds. Do you want to talk about that a little bit? Sure.
Speaker 2:Yeah, there's four parties involved in a segregated fund contract. There's the owner of the contract, so the person who enters into the investment with the insurance company. There's the annuitant, which often is the same as the owner, but not necessarily, and the annuitant is the individual whose life those guarantees are based on. Like the death benefit guarantees are based on the life of the annuitant, not the owner. So, while in most cases the annuitant and the owner can be the same, are the same person, in a non-registered, segregated fund contract you could have it set up where, like, I buy it, I own it, but it's my wife's life who's insured and if I were to pass away, the contract actually stays in force. So any time horizon guarantees or death benefit guarantees are not paid out when I die. They're paid out when the annuitant passes away, not the owner.
Speaker 2:And it gets quite complicated because you can then name successor annuitants and successor owners to these contracts. But beyond that, really there's like I said, the simplest way to think about it is there's four parties the owner, the annuitant, whose life the insurance is basically based on. The beneficiary, which is the individual who receives the benefits on the death of the annuitant. And then the last party, of course, is the insurance company who you're entering into the contract with. So it's important to note because they can be set up in a lot of, I guess, semi-complex ways.
Speaker 2:Depending on what your goals are Like, depending on who you want the funds to go to, you might choose different beneficiaries or different annuitants. So it can get pretty complex when you think about those four parties and then think about how you can also name successors. So if the annuitant passes away the contract, actually the new annuitant is now the life who's you know the the contract is based on. So you can get into these kinds of diagrams where, like, depending on where you want the money to go and whose life you want it based on and who owns it, there's a lot of variety in how they can be set up. But with RSPs and RIFs and TFSAs you can, you can hold, um, you can hold them there, but in those types of accounts the annuitant and the owner must be the same person. So it's only non-registered seg funds where you can get into these kind of strange diagrams of who owns what and when.
Speaker 1:gotcha okay, and so we uh, we're kind of getting into the complexity there in general, but to for the average listener, um, if you have a non-registered investment, you typically can't have a beneficiary on it outside of a SIGFRIEND product or traditional life insurance or whatever as well. But if you have mutual funds or ETFs in a non-registered or margin account or whatever the case is, you don't name a beneficiary on that and that gets passed through your estate or whatever mechanism you've set up in your will for that. So a named beneficiary on non-registered funds would largely be seen as a net positive, depending on the situation, but that would be a benefit of a SegFund product.
Speaker 2:That's right.
Speaker 2:So to your point, because of the insurance component, the SegFund contract, if you name a beneficiary that is a family member or what they call part of the family class, which includes parents, spouses and children and grandchildren, I believe, if one of them is named as the beneficiary when the annuitant passes away, the death benefit can go directly to that beneficiary and, as you pointed out, typically on a non-registered investment account that's not available.
Speaker 2:So it's a function of this product being able to name a beneficiary through the life insurance component that the value of the SEG fund can bypass your estate, and that's absolutely a benefit. No doubt because estates are complex, they can take a lot of time, they can be expensive to administer to if you have somebody charging executor fees for managing your estate, if you've got living in a province with high probate fees like we do I live in BC. Bc and Ontario generally have very high probate fees so you can save a lot of time and money to your state by naming the beneficiary. The problem with that, of course, is that to do so, you're paying these additional fees on the segregated fund contract in the first place. So if you look at like a segregated fund with a cost of 3%, a lot of insurance agents will say, well, it's actually not that much higher than the comparable mutual fund, Right? But my argument is but I don't think that's the right comparison because rather than whether that's true or not even.
Speaker 2:But yes, yeah, well, you're, you're always. It's always going to be more expensive, I think, just because you have to pay for the insurance cost of this thing, and then there's additional HST or taxes on that. So there's always going to be a bit of a difference, unless the insurance company is doing something like rebating or refunding of fees to keep the fees the same and they're just eating that cost. But generally speaking, I think it's reasonable to assume that the SEG fund is going to be more expensive than the comparable, the exact same version of it as a mutual fund without the life insurance, the exact same version of it as a mutual fund without the life insurance.
Speaker 2:But I don't think that's the right way to compare it, because that's not the only option that an investor has, right?
Speaker 2:I mean, an investor can go out and either, but they can buy an index fund.
Speaker 2:Even if they're going to pay an advisor, say 1%, they can still set up a very reasonably, a very reasonable cost portfolio using something like index funds, and your all in costs might be 1.3 to 1.5, 1.6%, something like that, right?
Speaker 2:So I think it's fair to think about this, as you're likely going to be paying somewhere between, let's say, 0.5 to 1.5% more annually to get access to the segregated fund. And so there comes this sort of you know cost benefit analysis or a breakeven analysis where, if you die and say you know year seven, you're going to have paid a lot more in fees on the segregated fund contract than your estate would have paid through probate and through executive fees and everything else anyway, right. And so I think if, if you know you're going to pass away in short order, you're younger than those age limits, then this might be a good way to set up your estate. But at the same time, if you're at that point of your life, you could just give the money away, right, like, if you're, if you're on your deathbed, like you just give the money to your beneficiaries right now. That also keeps it out of the estate and that keeps it free of all the fees from the estate and then you don't have to pay the fees for the seg funds, right.
Speaker 1:So I don't think there's this perfect scenario that jumps out as, like what are you trying to do at that point? Like eke out a few extra bucks if the market goes up in the next couple?
Speaker 2:of days.
Speaker 1:It's like give it away. We don't have a gift tax. Maybe that's maybe we're not stating the obvious, but I believe the U? S has gift taxes over certain thresholds and so we don't have that here.
Speaker 1:Yeah, so anyways, that's a great potential solution to to avoid this but yeah, what I've often heard for SIG funds is like, oh yeah, well, it bypasses probate, and it's like, okay, well, let's just do that. Just rough and dirty math. What is what's probate in BC? Is it 1.4? Yeah, dirty math. What is what's probate in BC? Is it 1.4? Yeah, here in Saskatchewan we're half that. It was like 0.7%, yeah, and so, um, and Alberta's flat rate. So if anyone's listening to this, um, make sure you double check, uh, in your province before making any decisions. Um, on your finances, of course, but Anyways, it is largely different depending on what province you're in. But say it's just 1% extra cost for the seg fund and 1% probate, it would be an error to say this is an equivalent thing. I'll just take the benefits, because the probate is a one-off cost on the total value, whereas the 1% on the investment is an ongoing cost that reduces your return every single year.
Speaker 2:Yep, yeah, and that's exactly it. Right, and even if you assume something like you know, a 5% executor fee for the person managing your estate because they they can charge fees for managing your estate, right, and the highest I believe they can charge is 5%. I've talked to a lot of trust companies who are professional executors and rarely are they actually going to charge 5%, but in theory an executor could charge 5%. So if you have a 5% executor fee and you've got, say, a 1.5% probate fee, like in Ontario, you've got a 6.5% cost to the estate. If you're paying 1% on the seg funds more than you could otherwise, your break-even there's just call it six and a half percent, without looking at like time, value of money and stuff, but just ballpark back of the napkin, six, six and a half years is how long it would take to break even on that, right, so as long if you outlive six and a half years, you would have been better off just paying all of the probate fees.
Speaker 2:Now, the expediency with which these things pay out, like life insurance, undoubtedly that I think that's an absolutely fantastic benefit, right, because a complex estate can take, you know, 12 to 18 months, or more, in many cases more to unwind. So being having the confidence that you can get the money to the beneficiaries quickly after you pass away is absolutely a valid use. Life insurance does that. You can buy life insurance. You can buy a permanent life insurance policy instead, more complex. Yes, you have to go through medical exams and everything, but there are still alternatives to buying a seg fund to solve that problem.
Speaker 1:Right, okay, what other benefits we covered? The guarantees, the name beneficiaries bypassing the estate as a result, then Anything else.
Speaker 2:Yeah, there's a couple other ones. So I think and again we won't get too much into the weeds on this one but being able to name the successor and owners and annuitants I think can be a benefit in certain circumstances. It's not obvious when that's going to be a benefit, but it could absolutely be a benefit in some cases. One kind of cool thing I like about these seg funds and again I think you can do this with life insurance as well is ann. So one kind of cool thing I like about these seg funds and again I think you can do this with life insurance as well as annuity settlement, so you can have them set up such that if you pass away, instead of, let's say, you have your child named as a beneficiary, instead of get them getting a lump sum, they would get an annuity so they get an income stream out of it. So I think that that can help from the perspective of preventing, like, a spendthrift child or somebody potentially with a disability from from accessing the money. That's. That's a reasonable benefit.
Speaker 2:I assume it's based on their age. It's based the annuity settlement, I believe. So I didn't look too much into the annuity settlement, to be honest. That would make sense I guess, right, yeah, cause, like you can, if you go to retire and you have seg funds in some cases you can also choose an annuity for yourself, so they can be converted into an annuity in a pretty easy way. But I assume to your point, when the annuity is chosen as the settlement option for the beneficiary, then it must be based on their age. It could be based on yours, the one that pays. That's a pretty juicy deal.
Speaker 1:Yeah, it would be.
Speaker 2:I think that's an interesting niche benefit that could be useful in some cases. The bigger one that comes up really, really often is creditor protection. Sure, so life insurance enjoys in general, far better creditor protection than things like RSPs or RIFs. Rsps and RIFs are generally decently protected, but it comes down to the province, so it depends. The federal legislation, I think, says they're protected from certain types of liabilities, but provincially it's going to depend on where you live, and they're usually only.
Speaker 2:I'm talking about RSPs and RIFs here. They're usually only protected in the case of bankruptcy, whereas with the life insurance contract they can be protected against other types of creditor claims as well. If you get the liability claim or something like that, life insurance and segregated funds are protected. So where this is often sold is to business owners who might have some kind of risk of a creditor claim in the future, and a seg fund can help with that. Now you still have to put money into a seg fund in good faith, right? You can't do it in anticipation of a claim. That's not legal, but for small business owners this is often touted as a benefit.
Speaker 1:Insurance companies have deep pockets and lots of lawyers, by the way.
Speaker 2:Yes, exactly so. For a business owner, okay, that makes sense. Now here's where it gets a little bit more complicated is if you have seg funds owned by a corporation, so you and I have talked about corporations before on this podcast. If you are a small business owner and you have incorporated your business, you can have the corporation owning the segregated fund contract, and on the surface that seems like it will provide an additional layer of protection for the assets in the corporation in case there's a claim against the company. Right when it gets confusing is that that's only true if you name a beneficiary of the family class. If you name a spouse or children as the beneficiary of the segregated fund policy that's owned by the corporation, then yes, it's credit or protected. The problem, though, is because the beneficiary of the insurance is not the corporation itself, and, as an individual, when you pass away or when the annuitant passes away I should say, assuming you are also the annuitant it can be seen as a taxable shareholder benefit to your estate. So you can end up in this position where the value of the segregated fund contract yes, there was creditor protection, but when you pass away, the full value of that contract gets taxed on your terminal tax return and so you can create this large tax liability by doing so. And so, from what I've read from the insurance companies generally, their suggestion is to name the corporation as the beneficiary of the segregated fund contract in order to avoid this tax issue.
Speaker 2:Well, okay, the problem is, when you do that, you lose the creditor protection. Okay, so you can't have both. So it's sold to small business owners, as this is great for creditor protection, but then at the same time, if you're supposed to name the corporation as the beneficiary, then you lose that creditor protection. So the only case that jumped out to me was like okay, if you're a sole proprietor and you don't have a corporation and maybe you've got, you know, a booming little plumbing business or something like that, you've got some uh, some you know positive cashflow that you've been saving but you're still worried about maybe some kind of claim for the business, sure, Then maybe a seg fund can work. I guess the issue there is that if business keeps going, you're likely going to want to incorporate at some point anyway. So for small businesses in the starting stages who do also have assets, maybe this is an okay way to do it. But again, I'm kind of reaching for scenarios.
Speaker 1:A bit of a niche case there. Yeah, for sure. Yeah, okay, I think so.
Speaker 2:Yeah, there is one other benefit that I found that that I do want to mention, and I think this is again, it's quite niche, but I found it really interesting. So if you are, if you're are disabled and you are looking to qualify for provincial disability assistance, so each province has their own provincial disability income assistance. In many cases, if not all I didn't look at every single province, I just looked here in BC and Ontario there is an asset test, so you won't qualify for the provincial assistance if your net worth is above $100,000 in BC. But there are certain types of assets that are exempt from that test and life insurance is one of them and segregated funds count as a life insurance product. So if you were about to qualify, if you were about to apply for provincial disability assistance and you're, you know the value of your assets was 105,000 and you wouldn't qualify In theory you could take $10,000 put into a segregated fund contract and now that won't be counted as an asset. And now your assets are $10,000 put into a segregated fund contract, and now that won't be counted as an asset, and now your assets are $95,000. They're under the $100,000 threshold and you might qualify for provincial disability assistance Very niche, but it was kind of cool that like, okay, this is a way to do it.
Speaker 2:Now one more comment there In BC only $1,500 of value in a cash in a life insurance contract is exempt. So in BC this is largely not going to work. But in other provinces in Ontario I think, it went up to $100,000 of cash value life insurance. So you could have $190,000 in assets. You could take 90,000 of it, stick it into a segregated fund contract and because it's under $100,000 of life insurance, you're good there. And because now your net assets after this segregated fund contractor $90,000, you would then qualify for Ontario Disability Assistance. So it's very, very, very niche but cool use case.
Speaker 1:My wheels are turning. Could you do that in a TFSA?
Speaker 2:I don't believe TFSAs are protected when they look at the asset requirements. Protected when they look at the asset requirements. So a TFSA is not exempt from those asset tests. Rdsps are, disability plans are, but TFSAs aren't. I'm not certain about RSPs. I'd have to dig back into it. I don't know about RSPs.
Speaker 1:So this would be a non-registered SIG fund in this hypothetical, exactly, it's a very low. There's very few cake and eat it too. Scenarios here that we're trying to explore.
Speaker 2:It was kind of a cool little. I'm like, okay, I can see it. I can see a case where somebody might do something like this and then qualify for the disability insurance Like sure.
Speaker 1:Great, yeah, gotcha, okay. So a lot of the benefits that we talked about already, and there are some, but to, to use the language of expected returns versus like possible returns um, are these expected benefits or possible benefits? Does that make sense?
Speaker 2:yeah, you know what I mean. It's like it's?
Speaker 1:are they doable to like, actually plan in advance to, to, to use some of these with known situations in your life? That's the thing.
Speaker 2:Um, I'm putting you on the spot with that, but it's like I'm yeah, the thing is I'm I'm hesitant to answer because I want to say no, but at the same time, like I just I'm. I'm not the authority on segregated funds and I know there are people who understand them far better than I do, but you're my authority today, mark. Sure, I know. But if I say no, I don't know, like a director of an insurance company is going to ping me on LinkedIn and say, actually, and that's good.
Speaker 1:Like if I'm wrong, then we'll re-record an episode, then we'll re-do another episode, yeah.
Speaker 2:Yeah, but to your point, it's very difficult to plan for. The benefits are generally low probability events. If we go back to the creditor protection thing for a second, I was looking at StatsCan and I'm pulling numbers from 2021 here. But in 2021, there were 90,000 insolvency filings in Canada. So the insolvency rate amongst adults was 0.29%. So the creditor protection thing again is also a very, very low probability of happening.
Speaker 2:And because you have to enter into a seg fund contract in good faith, you can't do it in anticipation of a creditor event or bankruptcy. You have to put it away at a time where you don't feel like there's any risk of a creditor claim. So you're making a bet that maybe at some point in the future I'm going to get sued or there's gonna be some liability that I can't manage. And the fees all along the way the extra 1% were they worth it at that point? I don't know, because if you didn't pay those 1% fees, you might have been able to have more assets to be able to satisfy the claim anyway or you might not have got into that creditor situation in the first place. Those who did file an insolvency claim the median total assets that they had were just over $11,000. So, generally speaking, those people who are having these problems are not the type of people who have a lot of assets obviously in the first place, and so they're generally not protecting a lot by using a segregated fund contract, right Like? The probability of somebody with hundreds and hundreds of thousands of dollars going into predator claims is lower, obviously, than the probability of somebody with a much lower asset base. So those probabilities are really really low and they can't really be foreseen in advance.
Speaker 2:The maturity guarantees, as we talked about, are unknowable. Whether those are going to be useful simply because it's a function of the performance of the underlying investment over some time horizon in the future. So that's unknowable. The death benefit is also unknowable, I'd say.
Speaker 2:If you're a super ultra conservative investor, to the point where you cannot stomach the idea of your money being worth less than it is today not counting inflation, but just worth less on a nominal basis after 10 or 15 years or something like that and the only way that you would invest your money to potentially participate in the upside of those underlying investments is to have this kind of guarantee in place.
Speaker 2:Otherwise you're just going to stick the money under your mattress, then perhaps I can see the benefit of a seg fund giving you the peace of mind of being able to invest the money. Having said that, as we talked about right off the hop, you're still going to experience the volatility of the underlying investments, and someone who is that conservative is still going to, in my experience, have emotional and psychological difficulties if the value of that investment goes down 10 or 15% in the meantime, even if they know there's some guarantee at the end. So there's still a behavioral component that you have to manage, because if you sell the contract, if you sell the underlying investment before the guarantee period is up, you just take the loss right.
Speaker 1:So it's only at the end of that time horizon that the guarantee kicks in. Yeah, that's to me. The product ends up being, it appears, more like it's a fear-based sale than it is. So, like life insurance, for example, you and I, we've got an end date right, and so that's a known right, and so that's why, even though these are both insurance products, I don't know for me I'll speak for myself here if I can equate them in terms of their obvious benefit to the living right, like with with what we, what we know, I understand term insurance, that's whatever. Permanent insurance totally makes sense in some way or another for the right scenario, and those are largely noble during our lifetime. It's just a matter of when. But it seems like a lot of the benefits of SIG funds get closer to preying on the fears of somebody as opposed to things that we know are going to happen someday.
Speaker 2:Yeah, and I think you know to your point buying life insurance, you're generally buying some multiple of the costs of the insurance and with something like term insurance, that multiple can be super high. Like, I've got 2 million of life insurance on myself and 2 million on my wife and we're just over 40 and we renewed I think in 2017, our contract and it cost me just under two grand a year to buy $2 million worth of insurance. And, yes, that has an expiry date. It's a term 20 policy, so it's going to be gone in about 14 years from now.
Speaker 2:But when you're buying a seg fund, the insurance component has almost like a one-to-one cost. Like if you're buying a $10,000 worth of a segregated fund, you're not getting a million dollars of insurance wrapped up in that. The insurance component only guarantees the $10,000. So as an insurance tool, it's very, very expensive insurance and you're only protecting the difference between the investment and the market value after that time horizon. So, like on a $10,000 seg fund contract, you might be protecting, you know, a thousand or $2,000 in a really bad case scenario, but if you put $10,000 into life insurance over 10 years, you might be able to buy $500,000 worth of insurance or something like that.
Speaker 1:Life insurance almost feels like it's it's leverage plus insurance. When you describe it that way, you know what I mean. Yeah, but I mean that's what you're protecting right Is your human capital Like you've got this, especially when you're young.
Speaker 2:You've got this risk that if I disappear, my income, my survivors are in trouble, but if, with a segregated fund contract, you're not giving the survivors that same type or level of protection, Gotcha.
Speaker 1:Okay, so you mentioned, um business owners potentially having a use case here. Someone who is, um, potentially ill, um, and maybe has a known shortened life expectancy, uh, some things like that. Maybe I'll. Uh, I'm getting to two different points here perhaps, but, um, are those the only people that are buying these things, that are buying them, or that should?
Speaker 2:be buying them, cause those are two different points here, perhaps, but are those the only people that are buying these things, that are buying them?
Speaker 1:or that should be buying them, because those are two different questions. Okay, that are buying them.
Speaker 2:I'll start there. No, and you and I both know this haven't been in the industry for a long, long time. So one thing that's I mentioned this briefly but these can only be in sold by life insurance licensed agents or advisors, and that makes sense because there's a life insurance component and, as we're discussing today, they're very, very complex. Now the problem and I have seen this many, many times over, and I'm sure you have as well is that somebody who is only licensed to sell life insurance does not have any other investment options available to them, generally speaking, except for maybe GICs and that type of thing. But they cannot sell you an index fund portfolio or a mutual fund. They cannot buy stocks for you. The only tool in their tool belt is going to be a segregated fund, and there are many advisors out there that are life insurance licensed advisors that are also managing portfolios and using seg funds to do it.
Speaker 2:I've met some I knew some long, long time ago who had hundreds of millions of dollars of their clients in segregated funds because it's the only tool they were able to use, and of course, they're going to justify the reasons for doing so. But, as you and I just mentioned, you and I have been, you know, life insurance licensed for the better part of our professional careers and we haven't used these because we have access to alternatives. That's why we generally don't use them is because it's not the best investment product. Again, it's just a tool. There are cases where it's going to make sense. Every single client they meet, the product that's in the best interest of every single one of their clients is segregated funds. Given that these are, like, again, very niche scenarios where these things actually make sense, that probability is zero, right, and so I've seen people get sold segregated funds when, by and large, they didn't need any of these guarantees, but it was the only tool that that particular advisor could use. So, again, it's just a tool, but in my experience and in my opinion, they are largely missold to investors because of that reason.
Speaker 2:The other thing I'll point out is that a lot the education required to sell these is just the life insurance licensing course.
Speaker 2:It has gotten more difficult over the years, I'm told. When I wrote mine in 2013 or whatever, I didn't find it that difficult, but I believe it's a lot more robust now. But my point is that somebody who's just passed an insurance licensing course can sell you these incredibly complex products. They may not have a lot of experience or education or background in things like retirement planning, tax planning, estate planning, portfolio management, and so, in the absence of looking at all these other areas of your financial plan, I find it disingenuous for somebody to sell you a segregated fund when they may not have looked at all of these things. That would, for me, as a planner, determine what products are best for a client right. So I've seen it happen where you walk in they try to sell you this and then justify why you should buy it, and they haven't looked at all these other areas and may not have the skills to look at all these other areas. So I think it's a bit dangerous.
Speaker 1:Yeah, we were just having a conversation here in our office. There's someone that we're aware of. I don't even know who it is by name, so we've kept this person's identity as insulated as possible. Believe it was the the mutual fund side of zero. Now, whatever it was used to be mfda and moved their uh, their practice over to an insurance only operation. They kind of gave up that, that registration, and so everybody that was in previously in mutual funds, etfs or whatever the individual is using now, all the clients that moved over were now invested in segregated funds and you cannot tell me that overnight all of those people are suddenly more um, their situation has changed to the point where it is now appropriate for every single one of those people to be in segregated funds.
Speaker 1:No, this is a situation of um. If you're a hammer, everything looks like a nail. Whatever. Am I butchering the, the, the phrase there? Um, no, that's it, and so that's, you know it's, it's inappropriate, you know, and it's um, and and, like you said, or you told me, um, before we started recording this $130 billion of Canadians' money in these products, and it's probably missold to many, many, many of these people. And that's an old number you said right.
Speaker 2:Yeah, that number is a few years old. The trend, when I looked at this report from one of the insurance companies, I think that's from 2021. But the trend was increasing and I think it's important to note that. When I looked at it, I think the ETF and mutual fund industry in Canada was, I want to say, about 2.6 trillion, so the seg fund business only represents like 5% of investable assets, which makes it seem okay, that's small, that's reasonable.
Speaker 2:Maybe there's 5% of cases where these are the optimal products, but it's not distributed evenly right. Like, as I mentioned, we've seen advisors where their entire book of $100 million of clients is all in segregated funds, and so I think that 5% is concentrated into the hands of those. This is totally anecdotal, but concentrated into the hands of those advisors who use them primarily. It's not common to see somebody managing $200 million of their client's investment assets and have $6 million of segregated funds as well, because that's the optimal product for those clients. I'm sure that does exist, but I think it's a bit skewed, because what you're seeing is some insurance advisors who can only use them are loading up all their clients with them, so that $130 billion is probably growing primarily as a result of those types of advisors, not because you know folks like you and me might use them very, very sparingly in optimal cases.
Speaker 1:Okay, let's. Maybe we should get into some of the differences there as well. We're going a little bit long already, but I think it is worth stating that it's like okay, well, yeah, maybe the costs are a little bit higher. Yeah, maybe it's their only option. Maybe someone says okay, close enough for me. Here's a couple of risks that I see for the insurance only channel selling what I believe are primarily investment products, kind of masquerading as insurance products a little bit the lack of a know your client obligation to sell these products.
Speaker 1:So you and I, on the investment side of things, we have to go through a process called KYC or know your client, and we have to understand a person's situation from a financial standpoint but also a bit of a behavioral standpoint, a timeline basis, a few things.
Speaker 1:It's not onerous, but it's valuable and it's required and we have to keep those things up to date every couple of years. On the insurance side of things, the KYC obligation doesn't exist. You don't have to do a KYC to sell a segregated fund, and so there again, I don't want to use anecdotal evidence or paint everybody with the same brush here, but it would make sense that the ease of sales because of the lack of oversight and regulation there would lead people down that path as well, which is a concern for me from the consumer standpoint. Would that be fair?
Speaker 2:Yeah, I didn't actually know that because, about the lack of KYC requirements, because I've never been in an insurance only situation, I've never sold a seg fund, so I'm actually not really familiar with what are the required disclosures and that type of thing I will say, uh, I was reading an interesting paper last week. Now this is a an examination of the Indian insurance industry, but I don't believe there's any reason to think that humans are fundamentally different across continents. It's just this happened to be a study in India that had some pretty good data, and what they found is that where insurance agents were required to disclose their compensation for the sale of a certain product, what they found was that those agents moved to different products where they were not required to disclose their compensation. And so to your point and again, I don't want to paint everybody with the same brush either. I work with some amazing insurance agents and I support them and I need them to do what I do.
Speaker 2:So to the listeners, I'm not trying to disparage the entire industry, but it's common for people to do exactly that. Right, if, if the disclosures are easier, the transparency is lower, you're naturally going to see, in aggregate, a move towards those lower transparency products, or at least you did in the Indian insurance market. And again, I don't believe there's a good, compelling reason to think that it would be different here just because we're on the other side of the pond right.
Speaker 1:That's a very good point.
Speaker 2:People will respond to incentives, and that's just it and we saw this when mutual funds banned DSCs deferred sales charges. I did see specifically one individual, but they did exactly kind of what you described is they moved a lot of their book over to segregated funds where they had not yet banned deferred sales charges. Now I believe they have, since I want to say in April 2023, deferred sales charges on segregated funds were eliminated. Don't quote me on that.
Speaker 1:That might be provincially specific too. I don't know that. So anyways, but I know it was later.
Speaker 2:Yeah, yeah, yeah. So that's exactly what we saw. Like you said, incentives matter and drive outcomes, and that's what happened. Yeah, so for the, and that's what happened.
Speaker 1:Yeah, so for the listener that's not familiar with DSC, this is the idea of your money being locked in for a set period of time in exchange for that insurance company or the investment firm paying a commission to your advisor or the agent, and of course that leads to negative outcomes or skewed benefits there. It rarely works in the favor of the end investor, of course. So that's why the product was banned. But because there was a gap in time between when it was banned, on certain sides you saw all sorts of crazy stuff going over there so that people could get paid more with less transparency, less regulation, less oversight. Yep, absolutely Perfect. How do we wrap this up now?
Speaker 2:I think there's a couple of alternatives, right. I think we covered at a high level what they are generally, how they work, what some of the benefits are, what the downsides are, which are largely related to costs. Two other things. One, assurance protection. So with Canadian mutual funds you are generally covered by the Canadian investor protection fund up to a million dollars per account type, right. So if you've got a RIF and a non-registered account, each of those accounts is separately protected up to a million dollars.
Speaker 1:That's in case of insolvency not like market decline.
Speaker 2:Yeah, 100%, yes, good point it's not protecting you like a guarantee on a seg fund is. It's not protecting you against the underlying performance of the investments. It's preventing or protecting you from the failure or insolvency of, like the dealer right, Like you're. You know, Evan disappears tomorrow, I disappear. Tomorrow, PWL disappears If we can't return the property to our clients, then CIPF sticks in, jumps in the Canadian Investor Protection Fund and again you're protected up to a million dollars per type of account.
Speaker 2:With segregated funds that's not the case. And so you have a nonprofit called Assurus that protects life insurance firms or protects, you know, policyholders, I should say against the insolvency of life insurance firms in Canada. But the level of protection is a lot different. And so with a segregated fund, you get about, I think you get 90% of whatever the guaranteed value is, or $100,000, of whatever the guaranteed value is, or $100,000, whichever amount is higher. So, for example, if you put $150,000 into a segregated fund with a 75% maturity guarantee, that's $112,500. After, let's say, 15 years, that's the value of that protection. 75% of $150,000 is $112,500.
Speaker 2:Again, Assurance protects you for up to $100,000 or 90% of the guaranteed value, whichever is higher. And so, in that example, 90% of the guaranteed amount $112,500,. 90% of that is $101,000. So in that case you're actually protected for $101,000 when you invested $150,000, which is about two thirds of the value of your investment. So you can get into these scenarios where you actually have a lot lower protection and and granted like life insurance companies are pretty resilient, right. So I'm not too worried about one of the big ones going down, but the level of protection you have is generally lower there's a reason why those protection or funds exist.
Speaker 2:Right, it's like, yeah, it's, it's an edge case, but it's a case, yeah, yeah yeah, we've got, you know, quite strong investor protections in canada all things considered, so it's not something to be concerned about, but it to me, on the surface at least, seems like um a downside compared to the CIPF protection that we get. And I think the last point is, I think there's a few alternatives that people can consider as well. We talked about like gifting money. If you're buying it for, like the death benefit and you're in older ages or you have a terminal disease or something like that, you can just give the money away instead, like assuming the rest of your financial plan supports that. But rather than buy the seg fund to get money out of your estate, just give the money away to your heirs. You can also use a family trust, so a family trust gets around probate. Now, generally you only do this for higher values, like higher liquid investment values, probably well over $500,000, before you want to consider implementing a family trust scenario. But if you're looking at seg funds for that reason and you have sufficient net worth, then a trust is largely going to be cheaper than the additional fees that come with seg funds. So I think that's an option.
Speaker 2:You could just buy insurance. Depending on your health, you could buy permanent life insurance or even a term to 100 policy or something like that to protect your beneficiaries and keep the money outside of the estate. So that's always an option. The nice thing about psych funds is you don't have to go through any kind of medical to determine your health status, so it is relatively easy. But an insurance contract, I think, can be a little bit more flexible and more robust.
Speaker 2:If you operate a business, a corporation will provide some level of creditor protection for you against your personal assets. But you should also be going and buying things like you know, liability insurance and that type of thing to prevent, to prevent or to satisfy creditor claims. An annuity can provide you with a lifetime income. If somebody was buying a seg fund so they could turn it into an annuity later on you can just go and buy an annuity. So I think there's reasonable alternatives to seg funds in most cases, depending on the reason you would look at a seg fund in the first place.
Speaker 2:Now we will conclude by saying again, these are just tools. I am surely missing some things, and I hope to hear from somebody in the insurance world that goes actually, here's the perfect scenario and I haven't thought about that right. I would love to have a more grounded and robust opinion on these things. I do think for the most part, you should be careful. If somebody is trying to sell you one of these things, do your own due diligence. Ask other people ping me or Evan, just be careful because you don't know if they're selling it to you because it's best for you or best for them.
Speaker 1:Yeah, I had a listener a few months ago already. I get people suggesting topics all the time, and one of them was a variety of different products that they were hearing about but weren't really familiar with, and one of them was seg funds. And so, mark, I really appreciate you coming on too. Really, we got into the weeds here and hopefully this was valuable for people that have heard of seg funds before or, if they ever come across them, hopefully you'll have a little bit more information in your arsenal to make a good decision for your situation. But yeah, thanks Mark for joining me today and hopefully we'll see in another six months. This seems like a pretty predictable ritual here. This is awesome to have you on.
Speaker 2:Yeah, no, I love it.
Speaker 1:Thanks for having me back and always happy to be here. Thanks again. Before making changes to your financial plan, Evan Neufeld is a certified financial planner and registered investment fund advisor. Mutual funds and ETFs are provided by Sterling Mutuals Inc.