1-888-601-9980
- Segregated funds combine market-linked growth with insurance features like capital guarantees and estate planning benefits, but several common myths often shape how they are perceived and understood
- One common myth is that higher fees mean poor performance, whereas in reality, they reflect added protection features
- Another misconception is that guarantees eliminate risk, but they only apply at maturity or death and do not protect against market fluctuations during the investment period
- They are also often seen as products for retirees or high-net-worth individuals, when in fact they can suit a wide range of investors with different financial goals
When it comes to investment options in Canada, segregated funds often remain a popular choice because they offer a combination of protection and growth for your investments. This hybrid nature also sometimes becomes confusing, especially for those who are first-time investors.
Are they too expensive? Do they always underperform? Are the guarantees even useful? There are many myths around segregated funds, and not all are true. In this blog, we break down the most common myths and facts about segregated funds so you can evaluate them based on how they actually work, rather than assumptions.
Segregated funds in Canada: The facts behind the myths
Segregated funds are insurance-based investment products offered by life insurance companies. They provide exposure to market growth while offering features such as capital guarantees and estate-planning benefits.
However, because they differ from traditional mutual funds, several misconceptions persist about their costs, performance, and flexibility.
| Myths | Facts |
| Seg funds are only for retirees | They are also useful for estate planning and risk-averse investors |
| Guarantees are always 100% | Typically 75%–100%, depending on contract terms |
| They are very expensive | Fees are higher than those of mutual funds but include guarantees and insurance benefits |
| You can’t access your money easily | Funds are redeemable |
| They are too complicated | Structure is different, but core investment principles remain familiar |
| They are only for wealthy people | Available across investment levels |
| Their performance is not as good as that of mutual funds | Performance depends on fund selection |
| Guarantees make them risk-free | Market risk still exists; guarantees apply only at maturity or death |
| Estate benefits are not significant | Bypass probate and allow direct beneficiary payouts |
Common myths about segregated funds explained
Myth 1: Seg funds are only for retirees
Why this myth exists:
Their guarantees and estate planning benefits are often more useful for older investors.
The reality:
While retirees benefit from capital protection and estate transfer features, segregated funds can also suit:
- Conservative or risk-averse investors
- Individuals nearing financial goals
- Business owners seeking creditor protection
- Investors prioritizing wealth transfer
Myth 2: Guarantees are always 100%
Why this myth exists:
Segregated funds are often discussed in the context of guaranteed returns. There’s a common misconception that these guarantees are 100%.
The reality:
Segregated fund guarantees are not always set at 100%, and the level of protection depends on the specific contract you choose. Most standard segregated funds offer a 75% guarantee on your invested capital at maturity or death, while some premium options may provide a 100% guarantee. However, it is important to note that a higher guarantee may come at a higher cost.
Myth 3: They are very expensive
Why this myth exists:
Segregated funds typically have higher management expense ratios (MERs) than mutual funds. This leads to the assumption that they are overpriced without understanding what those fees include.
The reality:
Segregated fund fees include both investment management and insurance guarantees. When compared purely on investment cost, they may seem expensive. However, when viewed as a bundled product combining insurance and investment, the pricing reflects additional protections not typically available in other investment products, such as mutual funds.
Myth 4: You can’t access your money easily
Why this myth exists:
Segregated funds are insurance contracts, so many investors assume that they do not offer flexibility and are locked in.
The reality:
Depending on the contract, most segregated funds allow you to withdraw at any time. Typically, the maturity period for segregated funds is 10 years. In case you withdraw before the maturity date, there can be potential penalties, fees, and reduced guarantees. To maximize benefits, wait until the maturity date before withdrawing.
Myth 5: They are too complicated
Why this myth exists:
Segregated funds are often confused with both insurance and investment products. There are certain insurance terminologies, like maturity guarantees, death benefits, and insurance contracts, that can feel unfamiliar to investors who are used to mutual funds or stocks.
The reality:
While segregated funds have a core structure that is quite similar to mutual funds, investors still select funds based on their risk tolerance and financial goals, and returns are driven by the market performance of the underlying assets, such as equities or bonds. There are fees associated with other investment products. The main difference is the added layer of insurance features, such as capital guarantees and estate planning benefits, which enhance protection but do not fundamentally change how the investment itself works.
Myth 6: They are only for wealthy people
Why this myth exists:
Segregated funds are often positioned as an investment tool for high-net-worth individuals. This misconception can make other investors assume the product is out of their reach or not relevant to their needs.
The reality:
Segregated funds are accessible to a broad range of investors and are not limited to high-net-worth individuals only. They can be a good choice for those looking for estate planning and capital protection, and for families planning wealth transfer.
Myth 7: Their performance is not as good as that of mutual funds
Why this myth exists:
Segregated funds typically have higher fees than mutual funds, which leads many investors to focus on net returns after costs and assume they consistently underperform. The cost comparison does not take into account the added protection features, creating confusion that their overall performance is poor.
The reality:
The performance of segregated funds depends on the underlying investments, which are often similar to those in mutual funds. Like mutual funds, their performance is also dependent on factors like asset allocation, fund manager decisions, and overall market conditions.
Myth 8: Guarantees make them risk-free
Why this myth exists:
The term “guarantee” often creates the impression that risks are completely eliminated. The capital protection feature sometimes gets highlighted in a way that how the guarantees actually apply often gets missed.
The reality:
Segregated funds are still market-linked investments, which means their value can fluctuate based on market performance. The guarantees apply at maturity or upon death; early withdrawals can result in receiving less than your original investment. This means you are still exposed to market risk, and guarantees are just a safety net. They do not make the investment completely risk-free.
9. Estate benefits are not significant
Why this myth exists:
Estate-related costs like probate fees are often overlooked. This leads to the perception that the estate benefits of segregated funds don’t add significant value.
The reality:
Segregated funds are a crucial estate planning tool, allowing assets to bypass probate in most cases and flow directly to named beneficiaries. This can result in faster payouts, reduced administrative delays, and greater ease compared to assets that pass through a will. It is also important to note that the probate fee varies depending on the province.
Are segregated funds worth it?
Segregated funds can be a valuable investment option for individuals seeking a combination of market growth, capital protection, and estate planning benefits. They can be a good choice for those who:
- Want some level of capital protection (75%-100% protection of investment at maturity or death)
- Are planning for estate transfer to named beneficiaries
- Prefer a balance between growth and protection
- Need creditor protection (for business owners)
To understand and get a suitable segregated fund in Canada, you can get in touch with our advisors at PolicyAdvisor. Our expert advisors will help you evaluate guaranteed investment funds and determine whether they align with your needs. Schedule a free call and get personalized advice today!
| Feature | Segregated funds | Mutual funds |
| Structure | An insurance contract issued by an insurer | Investment product offered by asset management companies |
| Capital guarantee | 75-100% at maturity or death | None |
| Death benefit | Pays the higher of market value or guaranteed amount | Not applicable |
| Estate planning | Bypasses probate with a named beneficiary | Typically goes through the estate |
| Creditor protection | Possible | Not available |
| Resets | Yes | Not available |
| Fees | Higher | Lower than seg funds |
Frequently asked questions
What are segregated funds in Canada?
Segregated funds are investment contracts offered by insurance companies. Seg funds combine market-linked investments with insurance guarantees, such as maturity and death benefits. Typically, you get a guarantee of 75%-100%.
Are segregated funds better than mutual funds?
There is no definitive answer to whether segregated funds are better than mutual funds. It depends on your goals. Segregated funds offer guarantees and estate benefits, while mutual funds typically have lower fees. The right choice depends on your financial goals.
Is there risk in segregated funds?
Yes, segregated funds also have risks associated with them. Their value can fluctuate with the market. Guarantees only apply at maturity or death, so early withdrawals can result in losses.
How long should you hold segregated funds?
They are generally designed for long-term investing, often with a maturity period of around 10 years to fully benefit from guarantees. If you withdraw early, it may result in lower returns and withdrawal fees.
Why are segregated funds more expensive?
They include both investment management and insurance features like capital guarantees and estate benefits, which increase overall costs.
Segregated funds combine investment growth with insurance guarantees, but they are often misunderstood. This guide breaks down common myths about fees, performance, risk, and flexibility, helping investors understand how these products actually work and whether they fit their financial goals.
