Q I am 85 years old. Is a segregated mutual fund with an insurance company with an average management expense ratio (MER) of 3.8% a good idea in RIFs ($220,300) and unregistered mutual funds ($301,000)? Thank you for your answer.
– Bernice
AND. Thank you Bernice for this great question. First of all, it is important to confirm exactly what a segregated fund is. Simply put, a seg fund is an investment in an insurance product sold only by licensed insurance agents. The management expense ratio (MER) of a segmented fund is higher because it includes the investment fee and the guarantee fee. There are also often fees (higher in the first few years of ownership) if you want to move out of a segregated fund. Below are some additional advantages and disadvantages of these products:
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Advantages and disadvantages:
Seg funds have their positive side. They come with a maturity guarantee (usually after 10 years of ownership) that guarantees you 75% or 100% of your original investment amount in the seg fund, even if markets decline and your amount is reduced. A death benefit guarantee will protect the value of your investment, even if the value decreases upon your death. Probate fees can be avoided upon death because assets can pass directly to the beneficiaries. Seg funds will provide creditor protection in the event of bankruptcy. And yes – they operate under RIF or unregistered accounts.
MORE: Pros and cons of segregated funds
The bad news is the high MER of seg funds of 3.8%. That’s a lot when you consider that the average MER of an actively managed mutual fund in Canada is 2.35%, and many index fund investments can have MERs of less than 0.5%.
I suggest you look for a product with a lower MER and make sure your risk tolerance and schedule are taken into account. This is necessary to get better value for your investment savings. It’s also important to consider your legacy wishes, tax planning strategies for now and at death, and whether you really need life insurance.
Conclusion?
I don’t think segregated funds would be the best option for you. Instead, consider talking to a financial advisor to get a broader picture of your current and future financial situation, so you can make a balanced and informed decision on both registered and unregistered investments to ensure they last a lifetime.
MORE ABOUT SEPARATE FUNDS:
