EXAM PRACTICE QUESTIONS 2 Flashcards
Jacob and Roxanna are in their late 20s. They both have full-time, well-paying jobs and have started investing monthly for a down payment on their first home. They plan on making the purchase of the house within two to three years.
Although Jacob and Roxanna have little investment experience, they have read a few personal financial columns and know about markets downturn and the potential or long-term gains by investing in equities.
The couple figures that they should have enough for a down payment with the amount they are investing, as long as they do not suffer any losses.
Which of the following measure of the risk scale would best apply to Jacob and Roxanna’s investment account dedicated for a down payment on their first home?
a) Low
b) Medium
c) Medium-high
d) High
The key in determining the risk scale for Jacob and Roxanna is to focus on the goal: a down payment for a house. The time frame of two to three years for this goal is short, and the full amount will be needed at the time of purchase.
This does not leave much time to recoup any losses. Jacob and Roxanna believe that they will accumulate enough for the down payment as long as they do not suffer any losses.
This is another strong indicator that the risk level for this particular investment is low.
Jacob and Roxanna’s age, employment status, and knowledge of investments are secondary to evaluating the risk scale for their down payment investment.
If they were to invest for their retirement, the risk level for that particular goal certainly would be higher.
Ref. 4.8.3
Vega, aged 58, had never held a paying job until last year when she started working full-time at the local gift shop. As a salaried employee, she contributes to the CPP. She wants to start receiving her CPP retirement pension benefit as soon as possible.
What is the earliest time that Vega can submit an application to receive her CPP retirement pension?
a) One month after turning age 59
b) On her 60th birthday
c) Six months before turning age 60
d) After contributing to the CPP for at least 10 years
To be eligible for a CPP retirement pension, a worker must have made one valid CPP contribution. Although Vega started her CPP contributions only a year ago, she is eligible for CPP benefits. To receive her retirement pension, an application must be made, but it cannot be submitted until one month after turning age 59. However, the retirement pension cannot start before age 60.
Ref: 4.4.2.1
Hanes and Eva opened a family RESP for their two children, Ilma and Henri. Ilma is graduating high school and going to university next year while Henri is just ten years old. Hanes and Eva want to make sure that they receive the maximum amount of the Canada Education Savings Grant they qualify for.
What is the maximum age Ilma and Henri can receive the Canada Education Savings Grant (CESG)?
a) 16
b) 17
c) 18
d) 19
The Canada Education Savings Grant (CESG) is a grant of money paid by the federal government. When an RESP is opened the financial institution applies for the CESG on behalf of the client. The grant is based on net family income and so low-income and middle-income families usually receive enhanced CESG payments.
If the total amount of grant for any one year is not received, it accumulates and can be carried forward until the end of the year in which the beneficiary turns 17.
The grant has a maximum amount per beneficiary and doesn’t need to be repaid as long as the beneficiary attends post-secondary education. RESPs are not taxed until withdrawals begin.
STUDY REFERENCE: 4.7.4 Registered education savings plan (RESP)
Aimo has a Deferred Profit Sharing Plan (DPSP) and an RRSP. He has been contributing to his RRSP regularly and would like to make one final contribution to make sure that he has contributed the maximum possible to his RRSP.
What is important for Aimo to remember about his DPSP and RRSP?
a) His funds are locked in his DPSP.
b) He cannot make withdrawals from his RRSP and DPSP.
c) DPSPs are governed by pension legislation.
d) DPSP contributions reduce available RRSP contribution room.
Aimo needs to be aware that DPSP reduces his RRSP contribution room. Contributions are only made by the employer and based on business profits. DPSPs are not governed by pension legislation, and funds are not locked in as they would be in a Registered Pension Plan. The funds are treated the same as any registered money in that any contributions reduce RRSP contribution room, and they are taxed when withdrawn.
STUDY REFERENCE: 4.6.1 Deferred profit-sharing plan (DPSP)
Greg had a Defined Benefit Pension Plan through his employer and recently passed away.
What is his spouse entitled to with respect to his pension plan?
a) The commuted value.
b) At least 60% of the pension to which Greg was entitled.
c) Only the principal amount of Greg’s contributions.
d) All of the pension to which Greg was entitled to at retirement.
Greg’s spouse is entitled to at least 60% of his pension. If he did not have a spouse, his named beneficiary could receive a lump-sum payment representing a commuted value of the pension.
STUDY REFERENCE: 4.5.1.3 DBPP benefits
Will is preparing his will and would like to leave his cottage to his granddaughter. He knows there will be some capital gains and would like to make sure there are enough funds to cover the tax when he dies.
Which is the LEAST suitable asset to cover this potential expense?
a) Savings Account
b) Segregated Fund
c) Life Insurance
d) Life Annuity
Will needs to use an asset with guarantees and protections so the funds that he allocates for the capital gains tax will be there when he dies.
Annuities, segregated funds, and life insurance are all creditor-protected assets that are exempt from probate fees. Will will be able to name the beneficiary as his granddaughter.
Section Reference: 4.2.3 Legal considerations
Joan recently received the death benefit cheque from her mother’s segregated fund contract. Joan believes that there was an overpayment on the death benefit and is concerned that the insurer will ask for the cheque to be returned.
Why did Joan receive a larger payout than she anticipated?
a) The market value of the contract was higher than the guarantee, and no withdrawals were made from the contract.
b) The contract had a life insurance option that increased the maturity benefit.
c) Joan’s mother over-funded the segregated fund and the gains were paid out to the beneficiary as stated in the contract.
d) The maturity benefit guarantee and the death benefit guarantee were paid out together, and Joan received both benefits.
It is possible for Joan to receive more than the guaranteed amount of the death benefit if the market value of the contract is more than the guarantee.
This is also true of the maturity guarantee. Segregated fund guarantees are meant to ensure that either the contract owner or the beneficiary receives at least the guaranteed value. In most cases, these guarantee range between 75% to 100% of the initial deposit(s) or reset values.
Guarantees are not meant to limit the potential growth within the contract and so, if the market value has grown to be more than the guarantees, the owner or beneficiary receives the increased amount.
There are several ways the guarantees can also be reduced or less than expected:
- Withdrawals are made from the contract in which case the guarantees will be adjusted downwards in proportion to the account balance
- A front-end sales charge has been applied and death occurs shortly after purchase
A front-end sales charge is less likely to be obvious after time because of the growth in the policy will be compensated for the charge.
Ref. 6.4.3.1
Hari is meeting with a client to review their segregated fund contract. He wants to make sure that he is prepared for the meeting. Which of the following that forms part of his client’s contract does Hari need to understand?
a) Risk disclosure
b) Advisor disclosure
c) Incontestability clause
d) Contractual exclusions
Hari will need to review what information forms part of the contract and it includes risk disclosure. All other options do not apply in this case.
There are many parts that form an insurance contract, and it is important that Hari and his client both understand its details. A contract includes details and fees, the contractual commitments to a segregated fund investor, and the right of rescission. Segregated fund contracts have information about the insurance and investment aspects of the contract.
Ref: 6.1
Francoise has been the annuitant of a registered segregated fund contract for the past 5 years. She recently had a daughter and would like to change the annuitant to her name.
What can Francoise do?
a) Once named, the annuitant cannot be changed, but his daughter can be named as the beneficiary.
b) As the annuitant, he has the right to make changes to the contract, and so his daughter can be named as the new annuitant.
c) Francoise can only add an additional annuitant to the contract, and so he and his daughter will become joint annuitants.
d) He will need to wait until his daughter is 30 days old before naming her the annuitant on his contract.
Unfortunately, Francoise cannot change the annuitant on his contract to his daughter. Once named, the annuitant cannot be changed. This is because the annuitant is the person on whose life the guarantees are based, and whose death triggers payment of the death benefit.
In this case, the guarantees are based on Francoise’s life. If he had named his daughter as the annuitant, the guarantees could be different. The death benefit will be paid out on Francoise’s death and not his daughter’s.
The best option is for him to name his daughter as the beneficiary or, when the contract matures, to start a new contract with his daughter as the annuitant. However, in a non-registered contract, prior to the death of the initial annuitant, a joint annuitant may be named to replace him if he dies.
Ref: 6.2.1.2
John has decided to make a withdrawal from his segregated account to ensure he can cover his financial obligations. The account has a current market value of $9,250 and he requires a full withdrawal to settle his bills.
What should John’s main concern be with regard to withdrawing the full account value to meet his financial obligations?
a) John needs to take into consideration that there will be charges and fees associated with the withdrawal.
b) John should not be concerned with the fees and charges because he is closing the account entirely saving himself from future cost.
c) John must ensure that his agent understands that he needs $9,250 net on closing.
d) John should not be concerned since the guarantee feature in a segregated fund contract ensures he receives the amount needed.
Withdrawing funds from a segregated fund can have financial consequences if done prior to the maturity date. Segregated funds are long-term investments and clients are discouraged from withdrawing or surrendering the contracts early. They are not meant to act as emergency savings.
There can be penalties or charges for an early withdrawal or surrender. In this situation, the amount received in the claim may not be the amount anticipated by the contract owner.
John must fully understand the effect of withdrawals, sales charge, guarantees and allocations. Subtracted from the amount paid out to John will be fees and charges, thus the amount will likely not cover his costs.
Ref. 6.4.3
Claude would like to invest his segregated funds into a bond fund. He is concerned about the possible risks associated with these funds.
Which of the following is true regarding bond funds?
a) They have high interest rate risk but low market risk.
b) They have high foreign exchange risk but low volatility risk.
c) They have low political risk but high inflation risk.
d) They have high market risk but low interest rate risk.
All funds are subject to specific risks based on their type. A bond fund is highly susceptible to interest rate risk but has little market risk. An equity fund, on the other hand, has very high market risk and low interest rate risk.
Ref. 5.2.5
The portfolio turnover rate is expressed as a percentage of the fund’s holdings that have been replaced during the previous year. A high turnover indicates:
a) a higher MER.
b) a buy-and-hold investment philosophy.
c) lower costs for trading.
d) improved investor returns.
The portfolio turnover rate is expressed as a percentage of the fund’s holdings that have been replaced during the previous year. The turnover rate is related to the MER because high turnover translates into higher expenses due to buying and selling costs. A low turnover indicates a buy-and-hold investment philosophy, and correspondingly lower costs for trading. A lower MER can improve investor returns.
STUDY REFERENCE: 5.2.11.8
Shana is on her way to a meeting where she must recommend an annuity product for a client. She is having a very difficult time finding a suitable solution for this person. Unfortunately, she left her fact-finding questions at home.
All of the following questions will help Shana when selecting the annuity except:
a) Are annuities invested in segregated funds more income-driven or savings-oriented?
b) Is it enough for the client to be covered, or should both the client and spouse be covered?
c) Does the client need a level income or is a variable income better?
d) Is the client’s income requirement temporary or lifelong?
Annuities cannot be invested in segregated funds; they are different products. The questions that an agent needs to have answered when making the recommendation for the best annuity product for the client are as follows:
- Does the client need income or savings?
- Is it sufficient for the client to be covered, or should it be the client and their spouse?
- Is the income need temporary or lifelong?
When does the client need income to begin? - Does the client need a level income or is a variable income better?
- How will the client fund the contract?
- What will the tax impact on the client be?
Once Shana gathers these details from her client, she can then match the right annuity to the client’s expectations and needs. If an analysis cannot lead to a satisfactory recommendation, Shana can proceed with the best available recommendation while pointing out its advantages and its shortfalls.
Ref. 5.3.1
James asks his advisor to provide a product that satisfies the following needs:
- A long-term savings investment that will take advantage of market returns
- A contract that guarantees some capital and allows him to name a beneficiary
What should James’ preferred investment vehicle be?
James wants an investment with the benefits of an insurance contract and the ability to tap into the performance of the capital market. His needs indicate that a long-term investment is most suitable. He is not seeking income from this investment, either now or in the future. The best option for James is a segregated fund. Segregated funds:
- guarantee some of the capital
- provide a death benefit
- allow the naming of a beneficiary
- offer the ability to bypass probate
It is important to analyze the benefits and limitations with your client’s needs in mind and to make a thorough comparison of funds suitable for those needs.
Ref. 5.1
Dorothy and Norman buy a joint and last survivor life annuity for $1,000,000 with a 20-year guarantee. They are both co-annuitants, their daughter Betty is the beneficiary, and Norman is the primary income recipient. Norman has been receiving $4,500 per month for thirteen years and one month when he passes away. Dorothy becomes the income recipient for the following four years and two months until she passes away. What lump sum amount of money does Betty receive, if any?
a) $148,500
b) $250,640
c) $931,500
d) $135,000
Betty would receive the balance of the income remaining on the 20-year guarantee. Norman received income for thirteen years and one month. Dorothy received income for four years and two months.
The number of months during which the annuitants received an income can be calculated as follows:
(13 × 12 + 1) + (4 × 12 + 2)
= 157 + 50
= 207
The 20-year guarantee provides 240 months of income, which means that Betty is entitled to 33 months of income.
240 – 207 = 33
33 months of income × $4,500 as the monthly income amount = $148,500.
Ref: 3.5.2.2
