Segregrated Funds & Annuities Flashcards
(35 cards)
Ariel is a 30 year old highschool music teacher who has investments in a 5-year GIC, a high interest savings account, and a money market segregated fund, Ariel’s major investment risk is:
a. Interest rate risk
b. Inflation risk
c. Credit risk
d. Market risk
Inflation risk
Rationale : her investments are all currently low risk. Because the GIC is guaranteed there is no risk there. The high interest savings account has low risk, but does carry the risk of falling interest rates. Because these are guaranteed investments with low rates of return, the risk is tied to inflation. If inflation exceeds the rate of return the investment can lose money
1.4.2 inflation risk
For the past 23 years Jennifer has worked for a company with a DBPP. The formula to calculate the pension benefit is 2% per year of the employee’s last five years of income. In Jennifer’s situation, that average income is $98,500. How much pension income can Jennifer expect to receive annually?
a. $45,080
b. $45,310
c. $9,850
d. $98,500
b. 45,310
Rationale : Formula is 2% of your average salary in the past 5 years x the number of years as a plan member:
Pension = 2% x $98,500 x 23
Pension = 1,970 x 23
Pension = $45,310
Pauline works for a company that has a DBPP, but is concerned about what might happen if the company goes out of business or is unable to fund the pension. Which of the following statements is most correct?
A. Pension payments are not guaranteed
B. Only DCPP have payment guarantees
C. It may be government guaranteed
D. DBPP are fully guaranteed by the government
C) It may be government guaranteed
As per section 1.3.11.4 Returns and guarantees of group plans, The only group pension plan that offers a guaranteed income on retirement is a DBPP. However, DBPPs can only guarantee the expected retirement income to members if their plans are fully funded.
Some employers have pension shortfalls. This means their liabilities are greater than their ability to pay. Pensioners could receive less than the promised amount of pension.
Some jurisdictions provide a guaranteed minimum income to pensioners who experience shortfalls due to underfunding. For example, in Ontario, the Pension Benefits Guarantee Fund insures pensions up to $1,000/month.
All of the following are characteristics of segregated income funds except:
A) often includes government and corporate bonds
B) typically includes large cap dividend income shares and preferred shares
C) mainly focuses on growth
D) fairly low risk and stable
A) often includes government and corporate bonds is correct as per 2.2.4 income funds/
“Typically includes large cap dividend income shares and preferred shares” is also correct, as these are lower risk investments
“Fairly low risk and stable” is correct also
Out of the following list who might feel there were disadvantages to investing in segregated funds?
A) a person saving for a home down payment in 3 years
B) a person with health issues wanting to maximize his estate
C) an individual wanting to reduce estate costs
D) an individual who owns a business
A) a person saving for a home down payment in 3 years
Rationale: a person saving for a home down payment in 3 years might view this as a disadvantage as per 1.3.1.1; minimum 10-year-term to maturity for the maturity guarantee to apply
Janet has $65,000 to deposit and has a choice between her bank’s 5-year GIC and her insurance company’s deferred annuity for the same time period. She chooses the insurance company’s deferred annuity because:
A) GICs are taxed annually whereas deferred annuities are not
B) As an insurance product it is not taxed until maturity
C) An annuity can be creditor protected bypass probate
D) It provides greater consumer security if insurance company becomes insolvent
C) an annuity can be creditor protected and bypass probate
Rationale : An annuity can be creditor protected and bypass probate is correct as per section 3.1.3 Creditor protection, and 3.1.4 Estate planning benefits
An employer wishes to start a group pension plan. After speaking with her life insurance agent she has also began to think about a group registered retirement plan. Which of the following statements is NOT accurate about a GRRSP?
A) this will provide the benefit of being a payroll savings plan
B) there are usually more investment options in a group plan
C) plan members may have access to the Home Buyer’s Plan (HBP)
D) Plan members may have access to the Lifelong Learning Plan
B) There are usually more investment options in a group plan
Rational: As per section 4.6.2 Group registered retirement savings plan (GRRSP), A GRRSP is identical to an individual registered retirement savings plan (RRSP), except offered on a group basis. Doing so enables members to pay lower fees on their group plan than they would pay on an individual plan. However, there may be fewer investment choices in a GRRSP.
A GRRSP also offers the benefit of being a payroll savings plan in which a member can enjoy the long-term advantages of regular savings.
Because the plan is an RRSP, RRSP features such as the Home Buyers’ Plan (HBP) or Lifelong Learning Plan (LLP) may be available to plan members with a GRRSP.
Your client, Dan, has asked you for some advice. He would like to know how much he can contribute to his RRSP in the current year without over contributing. Dan has a carry forward amount of $31,500 and a pension adjustment of $3,280 from the previous year. In addition Dan has been divorced for the past three years and pays $2,500 per month in alimony.
Given this scenario and based on the financial information below, how much can dan contribute this year
Current year base salary: $8,5000, Previous year $80
If a life insurance agent has no previous relationship with a client, and that client is a politically exposed foreign person investing in a non-registered account, the agent is required to submit an identification document, issued by the provincial or federal government. Out of the following list what is NOT an acceptable identification document?
A) passport
B) birth certificate
C) drivers licence
D) drivers insurance
D) Driver’s insurance
Matilda has been with her current employer for 16 years. That employer has a generous contributory DBPP that your client has taken advantage of. She has been recruited to a competitors firm and wants to know what her options are. Which of the following is NOT an option for your client?
A) transfer the commuted value DBPP to a LIRA
B) transfer the pension money to her RRSP
C) Transfer the pension monies to her new employer’s pension plan
D) leave the pension moneys with her current employer
B) Transfer the pension money to her RRSP
Rationale : A DBPP is locked in and must be transferred to another locked in account, such as a LIRA. An RRSP is not locked in because withdrawals can be made at any time.
Paul had a term annuity to age 90, and had named his three children as equal beneficiaries of the contract. Paul received monthly income from his annuity until he turned 86, when he died. At that time his children filed a death claim for Paul’s annuity. Which of the following statements is most correct
A) each were responsible for the tax on the sum they received
B) Each received the benefit payments tax free
C) each were responsible for tax, but only if they received a lump sum
D) Each were responsible for tax, but only if they received monthly income
A) each were responsible for the tax on the sum they received
Rationale: this question is taken directly from the example in 7.4.2.1
A married couple who classify themselves as very conservative investors have already contributed the maximums to their RRSPs and TFSAS and would like to invest more in other products. They would like to know which or the following options best fits their investing profile
a. Corporate bond mutual fund
B. Blue chip stocks
C) equity segregated fund that has a 100% death and maturity guarantee
d. Diversified Canadian equity mutual fund
C)
C is correct because since they have a conservative risk profile the death and maturity guarantees best suit their needs
Joe is retiring from his position with the manufacturing company that he’s been with for over the past 35 years. As part of his retirement benefits he has been given a lump sum if cash equal to the last five years of his salary. Since he is retiring early at age 60, he wants to know what the best option is to use this money to provide consistent income over the next five years, until his retirement pension begins. Which of the following choices should you suggest?
A) 5-year immediate term annuity
B) 5-year guaranteed term annuity
C) 5-yeqr variable income term annuity
D) 5-year deferred term annuity
A) 5-year immediate term annuity
Joe needs a steady income stream for the next 5 years. The 5 year term annuity will provide an income stream that will start immediately so that he will be able to live comfortably until his retirement pension starts.
Kevin has investments in a non-registered account. Since he understands that these investments are taxable, he is looking for the most tax-efficient option for them. Given this scenario which of the following segregated funds will be of most interest to him?
A) Canadian Dividend Fund
B) Canadian Bond Fund
C) Balanced Fund
D) U.S Equity Fund
A) Canadian Dividend Fund
Rationale : Dividends from Canadian corporations are taxed at a lower rate than interest income and foreign dividends. As such, the Canadian Dividend Fund is the most tax-efficient fund among the listed options.
On November 6, 2016 Jenny purchased a $200,000 non-registered segregated fund that invests in Canadian equities. The segregated fund has a 10 year, 75% maturity guarantee. If this fund matures on November 6, 2026 with an account value of $160,000, how much will Jenny receive from the maturity guarantee?
A) $150,000
B) $160,000
C) $0
D) $200,000
C) $0
Rationale: The question is asking for the value of the guarantee at maturity. Since the fund account value exceeds the guarantee there is no value to the guarantee. 2.1.1.1 Maturity Guarantee, if the market value is greater than the guarantee value, the policy owner receives the market value.
Sheila works for a company that provides generous group retirement and investment plans consisting of a DCPP, DPSP, GRRSP and TFSA. In addition to working for the company, she also owns a small marketing business. Unfortunately her business is not fairing well and she is concerned about being unable to repay the debts that her business has. Sheila is asking you if any of these group retirement and investment plans are not creditor protected?
A) DPSP
B) DCPP
C) TFSA
D) GRRSp
C) TFSA
Rationale: All members of a group plan enjoy creditor protection except when the account is a TFSA.
Sally is the owner of small technology company where the average salary is $55,000. In order to incent her best employees to stay with her company she wants to implement a group plan for retirement savings. Sally’s company is willing to contribute to the plan as long as her employees contribute as well. She wants to ensure that her company’s contributions are consistent so that she knows what they will be and that there are no additional charges. Sally also wants these contributions to go towards retirement and not anything else. What type of group plan will most effectively meet Sally’s needs?
Select one:
a. Deferred profit-sharing plan (DPSP)
b. Group TFSA (GTFSA)
c. Defined contribution pension plan (DCPP)
d. Group RRSP (GRRSP)
The correct answer is: Defined contribution pension plan (DCPP)
The DCPP will ensure that investments made in the plan are for retirement because of the locked-in provision. As well, the contribution of the employer will be consistent since it is a fixed percentage of employee salaries. Furthermore, the employer’s contributions will not trigger additional payroll taxes as they would with a GRRSP. Finally, the company can request that employees contribute to the plan, which is not possible with a DPSP.
The correct answer is: Defined contribution pension plan (DCPP)
Candice, a retired school teacher, receives $4,250 per month from her life annuity. She would like to know how much she would receive every month in the unlikely event that the insurance company providing the annuity went bankrupt. Given this scenario which of the following is correct?
Select one:
a. $2,000.00
b. $0.00
c. 3,612.50
d. $4,250.00
The correct answer is “$3,612.50”
Rationale
.85 x 4,250 = $3,612.50
3.1.5 Annuitant protection (Assuris coverage). When a promised benefit for a payout annuity is more than $2,000 per month, the annuitant receives Assuris protection for the greater of $2,000 per month or 85% of the promised benefit. For example, if a promised benefit is $4,250 per month, the annuitant would continue to receive $3,612.50 ($4,250 × 85%).
Relevant sections of exam preparation manual
3.1.5 Annuitant protection (Assuris coverage)
When presented with a choice between a bank’s 5-year GIC and an insurance company’s deferred annuity for the same time period, why might this client choose the deferred annuity?
Select one:
a. An annuity can be creditor protected and bypass probate
b. It provides greater consumer security if insurance company becomes insolvent
c. As an insurance product it is not taxed until maturity
d. GICs are taxed annually whereas deferred annuities are not
The correct answer is “An annuity can be creditor protected and bypass probate”
Rationale
Both these choices are the same. As per 1.3.6.6 Investor protection, The CDIC insures Canadian-dollar GICs, held at a CDIC member institution, with a term-to-maturity of 5 years or less, up to $100,000. As per 3.1.5 Annuitant protection (Assuris coverage) Assuris protects an accumulation annuity up to 100% of the contract value, up to $100,000. Therefore, if an annuity value is less than $100,000, the policy owner receives all of his deposit value. If the annuity value is greater than $100,000, he receives $100,000.
Relevant sections of exam preparation manual
1.3.6.3 Types of GICs. Fixed-interest GICs. The return on the GIC is a specific interest rate. Interest payment options include simple interest that is paid annually and interest that compounds annually and is paid at maturity. Even if the interest is not paid in any one year to the investor, it needs to be declared for income tax purposes.
3.1.3 Creditor protection
3.1.3 Creditor protection
3.1.4 Estate planning benefits
The correct answer is: An annuity can be creditor protected and
Which of the following statements is NOT correct?
Select one:
a. Segregated funds allow value resets at death and maturity, mutual funds don’t
b. Segregated funds report annual capital losses to their unit holders, mutual funds don’t
c. Mutual fund values grow by increases in unit value; segregated fund values grow by the addition of new units
d. Mutual fund buyers sign a prospectus; segregated fund buyers sign an Information folder
The correct answer is “Mutual fund values grow by increases in unit value; segregated fund values grow by the addition of new units”
Rationale
Looking for what are NOT differences
2.1.7 states that, “The number of units assigned to the investor does not change unless he makes an additional deposit or a withdrawal. However, unit value changes. It increases and decreases in step with the value of assets held within the fund”. Therefore both mutual funds and segregated funds show increases in unit values, not in the number of units, making this incorrect.
Relevant sections of exam preparation manual
2.1.7 Tax benefit of allocations
The correct answer is: Mutual fund values grow by increases in unit value; segregated fund values grow by the addition of new units
Out of the following list what is NOT true about a TFSA?
Select one:
a. A complete withdrawal of an individual’s TFSA balance can be redeposited into the TFSA in any subsequent year
b. Contributors make after tax deposits and the investments/savings growth and withdrawal are tax free
c. Low income earners should invest in a TFSA instead of an RRSP so that when they retire they won’t be in a higher tax bracket
d. Generally speaking, all non-registered financial products sold by financial institutions are eligible for deposit into a TFSA
The correct answer is “Low income earners should invest in a TFSA instead of an RRSP so that when they retire they won’t be in a higher tax bracket”
Rationale
The tax bracket at retirement would be unknown.
Relevant sections of exam preparation manual
4.7.3 Tax-free savings account (TFSA)
The correct answer is: Low income earners should invest in a TFSA instead of an RRSP so that when they retire they won’t be in a higher tax bracket
Mr. Domingo purchased a $250,000, 5-year accumulating segregated fund with a 5% interest rate maturing in 5 years. The value at maturity would be $319,070. At the end of 4 years, the value had climbed to $303,877 and interest rates had increased to 6%. Mr. Domingo decided that he wished to close the 5% fund so that he could reinvest in the current 6% fund. What is the market value adjustment that Mr. Domingo would pay at the end of 4 years to break his contract and receive his money?
a. $682.00
b. $0
c. $2,868.00
d. $15,193.00
Feedback
Your answer is incorrect.
The correct answer is “$2,868”
Rationale
3.6.3.1 Withdrawals. Accumulation annuities permit withdrawals, subject to minimum and maximum amounts. When a withdrawal is made from an accumulation annuity, a market value adjustment (MVA) may be charged if an investment held within the annuity has not reached its maturity date. An MVA is not charged if the withdrawal is made from an interest-bearing investment option.
To solve this we must find the 1 year PV of the 5 year maturity rate at both 5% and 6%. Since we are giving the PV at 5% we only need to calcuate the PV at 6%. Then we subtract the two and come up with the penalty, which is the market value adjustment.
PV = FV ÷ (1 + interest rate)n
PV= 319070 / (1 + 6%)1
PV= 319070 / (1+.06)1
PV= 319070 / (1.06)1
PV= 319070 / 1.06
PV= 301009.433962
PV = $301,009 (rounded off)
This is the present value of the amount that would need to grow to the maturity amount at 6%. Since we know that the amount that will grow to the maturity amount at 5% is $303,877 (this is given to us in the question) we must now subtract the two to tell us what the difference is, which is what the market value adjustment will be.
(Value at 4 years @ 5%) - (Value at 4 years @ 6%)
303,877.00 - 301,009
= 2,868
Therefore the market value adjustment is $2,866.76
Relevant sections of exam preparation manual
3.6.3.1 Withdrawals
The correct answer is: $2,868.00
In addition to interest rate risk, what is the primary risk of investing in an annuity?
Select one:
a. Diversification risk
b. Inflation risk
c. Credit risk
d. Loss of principal
The correct answer is “Inflation risk”
Rationale
1.3.2.5 Risks of investing in annuities, which states that, Interest rate risk is the primary risk of an annuity investment. If interest rates rise after the contract is finalized, the investor cannot benefit from the higher rate. The investor may also be subject to inflation risk. Inflation is the measurement of increase in the Consumer Price Index (CPI) that measures the cost of goods and services. It generally sees prices increase and partly explains why goods and services cost more year after year.
Relevant sections of exam preparation manual
1.3.2.5 Risks of investing in annuities
The correct answer is: Inflation risk
Bobby owns a segregated fund contract with a 100% maturity and death benefit guarantee. Bobby named his son, Jack, as the contract’s beneficiary. Bobby passed away today. The contract was started with an investment of $80,000 and Bobby has withdrawn total of $10,000. As of today’s date the contract value is $60,000. As the beneficiary, how much will Jack receive?
Select one:
a. $60,000
b. $80,000
c. $80,000 adjusted for partial withdrawals
d. $60,000 or the guaranteed amount adjusted for partial withdrawals, whichever is greater
Your answer is correct.
The correct answer is: $60,000 or the guaranteed amount adjusted for partial withdrawals, whichever is greater
Rationale
The beneficiary will get the greater of the market value or the guaranteed amount after adjustments for partial withdrawals that have been made. In this case, Bobby has withdrawn $10,000, meaning the guaranteed amount is $70,000, even though the market value is $60,000.
The correct answer is: $60,000 or the guaranteed amount adjusted for partial withdrawals, whichever is greater
