LLQP Segregated Funds and Annuities 5 — Questions and Answers
Question 1: A client wants an annuity that will provide income for as long as either she or her spouse is alive. Which annuity type should be recommended?
- Life annuity — single life
- Joint and last survivor annuity (Correct answer)
- Term-certain annuity
- Deferred annuity
Correct answer: Joint and last survivor annuity
A joint and last survivor annuity continues payments until the last surviving annuitant dies, making it ideal for couples.
Question 2: Which of the following is a potential disadvantage of irrevocably naming a beneficiary on a segregated fund contract?
- Loss of creditor protection
- The policyholder cannot change the beneficiary without the beneficiary's consent (Correct answer)
- The death benefit becomes taxable
- The maturity guarantee is reduced
Correct answer: The policyholder cannot change the beneficiary without the beneficiary's consent
When a beneficiary is named irrevocably, the policyholder loses the unilateral right to change or remove that beneficiary without their written consent.
Question 3: For LLQP purposes, what is the primary regulatory body overseeing segregated fund contracts in Canada?
- The Office of the Superintendent of Financial Institutions (OSFI)
- Provincial insurance regulators (Correct answer)
- The Investment Industry Regulatory Organization of Canada (IIROC)
- The Canada Deposit Insurance Corporation (CDIC)
Correct answer: Provincial insurance regulators
Segregated funds are insurance products regulated primarily by provincial insurance regulators, not securities regulators.
Question 4: A client who is age 70 purchases a deferred annuity. What is the primary tax consequence of the annual growth inside the contract?
- It is taxed annually as investment income
- It accumulates tax-deferred until withdrawals are made (Correct answer)
- It is exempt from all taxes
- It is taxed as a capital gain each year
Correct answer: It accumulates tax-deferred until withdrawals are made
Growth inside a deferred annuity accumulates on a tax-deferred basis; taxes are only triggered when funds are withdrawn or the annuity begins paying income.
Question 5: What happens to the death benefit of a segregated fund if the market value exceeds the guaranteed death benefit amount at the time of the annuitant's death?
- The beneficiary receives only the guaranteed amount
- The beneficiary receives the higher market value (Correct answer)
- The excess is forfeited to the insurance company
- The contract automatically resets the guarantee
Correct answer: The beneficiary receives the higher market value
The beneficiary receives the greater of the market value or the guaranteed death benefit, so if market value is higher, they receive the market value.
Question 6: Which of the following annuity payout options provides the highest periodic income payment to a single annuitant?
- Life annuity with a 20-year guarantee
- Straight life annuity with no guarantee period (Correct answer)
- Joint and last survivor annuity
- Term-certain annuity to age 90
Correct answer: Straight life annuity with no guarantee period
A straight life annuity with no guarantee period provides the highest payment because there is no residual value or survivor benefit reducing the payout.
Question 7: Under the LLQP framework, a key suitability consideration before recommending a segregated fund over a mutual fund is whether the client:
- Prefers daily liquidity with no surrender charges
- Values the insurance guarantees and potential creditor protection enough to justify the higher MER (Correct answer)
- Has a short investment horizon of less than one year
- Wants exposure to foreign equities only
Correct answer: Values the insurance guarantees and potential creditor protection enough to justify the higher MER
The advisor must determine if the client's need for insurance guarantees and creditor protection justifies the typically higher cost of a segregated fund versus a mutual fund.
LLQP Segregated Funds and Annuities 5
A client wants an annuity that will provide income for as long as either she or her spouse is alive.
Which annuity type should be recommended?