{"id":1641,"date":"2024-06-07T18:28:06","date_gmt":"2024-06-07T18:28:06","guid":{"rendered":"https:\/\/financeify.ca\/?p=1641"},"modified":"2024-06-07T18:28:06","modified_gmt":"2024-06-07T18:28:06","slug":"guaranteed-products-are-not-interchangeable","status":"publish","type":"post","link":"https:\/\/financeify.ca\/index.php\/2024\/06\/07\/guaranteed-products-are-not-interchangeable\/","title":{"rendered":"Guaranteed products are not interchangeable"},"content":{"rendered":"

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(February 2006) With more and more major protected bonds and market-linked GICs currently making headlines, many clients may not be thinking about segregated funds. And while they serve a different purpose than the next generation of guaranteed products, they could face a challenge from newcomers over the next few years.<\/p>\n

\u201cThe first segregated funds were introduced to the market with a 10-year term and a 10-year guarantee, and they really started to gain popularity in 1997 and 1998,\u201d says John Lutrin, executive vice president and chief marketing officer at Hub Financial. \u201cOver the next year or two or three, we will see the first wave of seg funds mature.\u201d<\/p>\n

As these funds mature, will investors leave their capital in the hands of the company that has brought them this far, or will they seek out the newest major protected products?<\/p>\n

\u201cWill these impact the seg fund market? I don’t expect that to happen, but it’s impossible to tell because we get investors who see protection but maybe also want some better benefits,” says Sandra McLeod, CFP, director of succession and estate planning at Grant Thornton in Toronto. \u201cThis is how they will be sold.\u201d<\/p>\n

\u201cMy concern is, do people really understand what these things are and how they impact their current and future portfolios?\u201d she asks. \u201cBecause they are so readily available, there is a risk that some people may not know what they are buying. The counselor may explain it well, but the client may not understand what the implications are.<\/p>\n

In the late 1990s, some of the most popular seg funds were based on index funds, which provided exposure to the rapid growth of technology, and the guarantee gave investors a level of comfort. Lutrin argues that as the influx of products has increased, manufacturers have become overly competitive in the features they offer.<\/p>\n

\u201cWhat happened was that segmented funds took on an absurd structure because they became more and more attractive as life insurance companies became less and less concerned about risk,\u201d Lutrin says. Maturity guarantees were increased from 75% to 100% and resets were introduced, allowing investors to lock in profits.<\/p>\n

However, when the markets crashed in 2000, producers had to keep their finger on the pulse. Suddenly they found themselves in need of a 100% guarantee that could be reset at the top of the market.<\/p>\n

\u201cThe irony of these resets is that they have served the company very well,\u201d Lutrin says. \u201cThanks to this, although they are still interested in profit, the maturity dates are spread over time. This will also, to some extent, limit the impact of the huge wave of maturities.<\/p>\n

\u201cIf you had asked carriers two or three years ago what they thought about this, you would have found that they were really hesitant, which is why so many of these products were increasing their MER, doing different things to minimize exposure, to deal with the onslaught of simultaneous payout of these warranty. It won’t be as difficult as initially expected. “<\/p>\n

Not just another warranty<\/b><\/p>\n

Since then, the industry has matured greatly, Lutrin says, to the point where seg funds are now essential products that cannot be easily replaced by a proper financial plan.<\/p>\n

\u201cAt first the craze was about underwriting, but over time I think life advisor has grown in sophistication around other features of a segmented fund,\u201d Lutrin says. \u201cIt is now sold as an integral part of a financial plan.\u201d<\/p>\n

While mainstream protected bonds and market-linked GICs may make mainstream headlines, clients need to be educated on the difference between new structured products and the benefits of segregated funds.<\/p>\n

\u201cThe benefits of estate planning and the life insurance aspect are much more discussed in client conversations,\u201d Lutrin says. Unlike protected notes, a death benefit incorporated into a SEG trust allows the principal to be paid immediately to the beneficiary, bypassing inheritance and estate taxes.<\/p>\n

\u201cBecause you can name a beneficiary, just like you would with a life insurance contract, you can bypass probate,\u201d he says. \u201cNothing is liquidated in an estate \u2013 there are no delays or probate fees \u2013 so the aspect of being in a segregated fund is extremely attractive.<\/p>\n

However, if the client is simply looking for a guaranteed investment product, he admits that secured bonds have some advantages over segment funds. A typical seg fund offers only a 75% guarantee at maturity, with 100% guarantee being available mainly for the death benefit.<\/p>\n

Additionally, the new wave of structured products typically offer shorter maturities than the typical 10-year maturity of segmented funds. The shorter maturity reduces the main source of risk in guaranteed products: opportunity risk. Because the investor recovers his capital faster, he will be able to redistribute his funds faster.<\/p>\n

\u201cThe amount of competition that overlaps between seg funds and PPNs, due to guarantees, is really relatively small,\u201d Lutrin says. \u201cI don’t think they have enough in common to argue with the linked notes and stuff.<\/p>\n

\u201cWhat I’ve noticed is that all these alternative products that are coming out all the time are very often appealing to a slightly more aggressive market rather than the typical life insurance customer.\u201d<\/p>\n

\u2022 \u2022 \u2022<\/p>\n

For more information on segregated funds, read this article Electronic supplementation of distributed funds<\/a>.<\/p>\n

Submitted by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com <\/i><\/p>\n

(21\/02\/06)<\/i><\/p>\n

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(February 2006) With more and more major protected bonds and market-linked GICs currently making headlines, many clients may not be thinking about segregated funds. And while they serve a different purpose than the next generation of guaranteed products, they could face a challenge from newcomers over the next few years. \u201cThe first segregated funds were […]<\/p>\n","protected":false},"author":1,"featured_media":1642,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"om_disable_all_campaigns":false,"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[18],"tags":[164,874,210],"class_list":{"0":"post-1641","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-seg-fund-investments","8":"tag-guaranteed","9":"tag-interchangeable","10":"tag-products"},"aioseo_notices":[],"yoast_head":"\nGuaranteed products are not interchangeable - Financeify<\/title>\n<meta name=\"description\" content=\"(February 2006) With more and more major protected bonds and market-linked GICs currently making headlines, many clients may not be thinking about\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/financeify.ca\/index.php\/2024\/06\/07\/guaranteed-products-are-not-interchangeable\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Guaranteed products are not interchangeable - 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