Abstract Phase separation of soluble proteins into insoluble deposits is associated with numerous diseases. However, protein deposits can also function as membrane‐less compartments for many cellular processes. What are the fitness costs and benefits of forming such deposits in different conditions? Using a model protein that phase‐separates into deposits, we distinguish and quantify the fitness contribution due to the loss or gain of protein function and deposit formation in yeast. The environmental condition and the cellular demand for the protein function emerge as key determinants of fitness. Protein deposit formation can influence cell‐to‐cell variation in free protein abundance between individuals of a cell population (i.e., gene expression noise). This results in variable manifestation of protein function and a continuous range of phenotypes in a cell population, favoring survival of some individuals in certain environments. Thus, protein deposit formation by phase separation might be a mechanism to sense protein concentration in cells and to generate phenotypic variability. The selectable phenotypic variability, previously described for prions, could be a general property of proteins that can form phase‐separated assemblies and may influence cell fitness.