Segregated Funds and Annuities Flashcards

An investor owns a segregated fund contract with a 75% maturity guarantee. The contract matures today. He initially invested $100,000, and due to poor market performance, the current market value is $70,000. How much is the investor entitled to receive upon maturity?

Answer: $75,000, based on the maturity guarantee.

Segregated fund contracts provide a maturity guarantee, which ensures that at the maturity date (typically after 10 years or more), the investor will receive the greater of the current market value or a specified percentage (commonly 75% or 100%) of their initial investment. In this case, the 75% guarantee on a $100,000 investment is $75,000. Since this is greater than the current market value of $70,000, the insurance company tops up the value to the guaranteed amount.

Which of the following scenarios would most likely result in a segregated fund's assets being protected from the contract holder's creditors?

Answer: The contract holder has named their spouse as the beneficiary.

Segregated funds, being insurance contracts, offer potential creditor protection. This protection is generally effective when a beneficiary from a preferred or 'family class' (such as a spouse, child, grandchild, or parent) is named. Naming the estate or a corporation does not provide this protection, and while an irrevocable beneficiary offers some protection, the strongest case is typically made with a family-class beneficiary.

An annuitant is looking for a retirement income stream that will last for their entire life but is concerned about dying shortly after payments begin. They want to ensure that if they die within the first 15 years, their spouse will continue to receive payments for the remainder of that 15-year period. Which type of annuity would best meet these specific needs?

Answer: A Life Annuity with a 15-year guarantee period.

A Life Annuity with a guarantee period (also called period certain) is the correct choice. It guarantees payments for the annuitant's entire life. Additionally, the guarantee feature ensures that if the annuitant dies within the specified period (15 years in this case), payments will continue to a named beneficiary until the end of that period. A Straight Life Annuity would cease upon death, and a Term Certain Annuity would stop after 15 years, even if the annuitant is still alive.

What is the primary function of the 'reset' feature in a segregated fund contract?

Answer: To lock in investment gains by increasing the guaranteed death benefit and/or maturity value to the current higher market value.

The reset feature allows a contract holder to lock in market gains. When the market value of the fund is higher than the initial deposit, the holder can 'reset' the guaranteed amount to this new, higher value. This increases the death benefit and maturity guarantees. However, exercising a reset on the maturity guarantee typically restarts the contract's term (e.g., a new 10-year period begins).

A client uses non-registered funds to purchase an annuity. They want their after-tax income from the annuity to be as level and predictable as possible throughout the payment period. Which tax treatment should they choose?

Answer: Prescribed taxation.

Prescribed annuity tax treatment averages the taxable interest portion and the non-taxable return of capital portion over the life of the annuity. This results in a level, consistent amount of taxable income each year. In contrast, non-prescribed (accrual) taxation results in a higher taxable interest portion in the early years, which declines over time.

Which of the following is a key difference between segregated funds and mutual funds?

Answer: Segregated funds are classified as insurance contracts, which provides features like death benefit guarantees and potential creditor protection.

The fundamental difference is their legal structure. Segregated funds are individual variable insurance contracts (IVICs) offered by insurance companies. This structure allows them to offer insurance guarantees (maturity and death benefit) and features like probate bypass and potential creditor protection, which are not inherent to mutual funds.