LLQP Segregated Funds and Annuities 4 — Questions and Answers
Question 1: A client's segregated fund contract matures and the market value is below the guarantee amount. Who bears the cost of the maturity guarantee shortfall?
- The policyholder
- The insurance company (Correct answer)
- The fund manager
- The government deposit insurer
Correct answer: The insurance company
The insurance company bears the cost of making up the shortfall between the market value and the guaranteed maturity amount.
Question 2: Which feature of a segregated fund contract allows a beneficiary to bypass the estate and receive proceeds directly upon the annuitant's death?
- Maturity guarantee
- Named beneficiary designation (Correct answer)
- Reset provision
- Creditor protection
Correct answer: Named beneficiary designation
A named beneficiary designation allows death benefit proceeds to pass directly to the beneficiary, bypassing the estate and avoiding probate.
Question 3: A life annuity with a 10-year guarantee period pays out for life but guarantees payments for at least 10 years. If the annuitant dies after 3 years, how many more years will payments continue to a beneficiary?
- 3 years
- 7 years (Correct answer)
- 10 years
- Payments stop immediately
Correct answer: 7 years
Since 3 of the 10 guaranteed years have elapsed, payments will continue to the beneficiary for the remaining 7 years.
Question 4: What distinguishes a variable annuity from a fixed annuity?
- Variable annuities are only available to seniors
- Variable annuity payments fluctuate based on investment performance (Correct answer)
- Variable annuities have no fees
- Variable annuities cannot name a beneficiary
Correct answer: Variable annuity payments fluctuate based on investment performance
Variable annuity payments fluctuate because they are linked to the performance of underlying investment sub-accounts.
Question 5: A segregated fund's Management Expense Ratio (MER) is typically higher than a comparable mutual fund MER because it includes:
- Higher trading commissions
- The cost of insurance guarantees (Correct answer)
- Foreign withholding taxes
- Currency hedging fees
Correct answer: The cost of insurance guarantees
Segregated funds carry a higher MER than mutual funds primarily because the MER includes the cost of the insurance guarantee features.
Question 6: Under LLQP principles, which of the following best describes the 'reset' option in a segregated fund?
- Allows the client to withdraw funds without penalty
- Locks in a higher market value as the new guarantee base on a specified date (Correct answer)
- Resets the MER to a lower level
- Cancels the existing contract and issues a new one
Correct answer: Locks in a higher market value as the new guarantee base on a specified date
A reset option allows the policyholder to lock in a higher market value as the new guaranteed amount, typically restarting the maturity period.
Question 7: An indexed annuity links its growth to a market index but typically includes which protective feature?
- Unlimited upside participation
- A floor that prevents negative returns (Correct answer)
- Monthly rebalancing of the index
- Full CDIC deposit insurance
Correct answer: A floor that prevents negative returns
Indexed annuities typically include a floor (often 0%) that protects the contract value from negative index returns.
LLQP Segregated Funds and Annuities 4
A client's segregated fund contract matures and the market value is below the guarantee amount.
Who bears the cost of the maturity guarantee shortfall?