EXAM PRACTICE QUESTIONS 3 Flashcards
Pat and her advisor are discussing the differences between a non-registered segregated fund account and a registered segregated fund account.
Which of the following can an owner of a non-registered account do, that the owner of a registered account cannot do?
a) Transfer ownership of the contract.
b) Name a beneficiary to the account.
c) Withdraw funds from their account.
d) Transfer money from another permitted account to the segregated fund account.
Only a non-registered account holder can transfer the ownership of the account, thereby naming a successor owner. Both non-registered and registered account holders can name beneficiaries to the account, withdraw funds from the account, and transfer funds from another permitted account.
(Refer to Section 6.2.1.1)
Lena wishes to purchase a segregated fund that invests in Canadian equities. Her advisor, Manish, suggests the S&P/TSX Composite Index Fund, which invests in the same securities in the same weight as the index. Lena thinks this is a good idea because it means that the investment would be risk-free as it would just mirror the index. She believes that her return would be identical to the index. What should Manish explain to her?
a) The return would always be slightly less than the return of the index as fees are charged for the fund.
b) No index fund is able to buy the securities in the index in exactly the same weight. There will always be some discrepancy which will alter the return.
c) The return could actually be slightly higher as the fund would not have the same fees as the actual index.
d) Indexes are proprietary products so it would not be easy to find out what securities and weight are in the index in order to copy it.
An index fund is a mirror of an index, such as the S&P/TSX Composite Index, that invests in the same stocks that are listed on the index.
Therefore, if the index rises, the index fund will also rise. Its results will be slightly less than that of the actual index because of the fees that are charged to the fund.
This form of investing is known as passive investing because the investment manager mimics the index chosen for a particular fund and maintains the same securities in the same weight.
Lena’s return would be slightly lower than the return of the index. The make up of the S&P/TSX Composite Index is public knowledge.
Ref: 2.2.10
Jelani is approaching retirement and is purchasing an annuity to fund her daily expenses after she retires. She does not have experience investing but understands that inflation might increase some of her expenses and is concerned the payments will not be enough.
What are Jelani’s options to maintain her current standard of living after retirement?
a) She can purchase an indexed income annuity in which payments increase with the inflation rate.
b) She can reduce the amount of money she spends on her expenses.
c) She can opt for an enhanced annuity which will increase her monthly payments.
d) She can purchase a variable income annuity.
Jelani should opt for an indexed annuity that increases income over the payment period. Indexing an annuity increases payments annually by a percentage selected by the policy owner. Therefore, income increases year over year to keep pace with rising costs.
She can reduce her expenses, but it will also reduce her standard of living.
A variable income annuity is not a suitable recommendation for Jelani considering her age and lack of investment experience.
An enhanced annuity is issued when the annuitant has a shortened life expectancy due to poor health, which is not the case with Jelani.
Reference section: 3.4.4 Indexed income
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
Erika and Russell are owners and co-annuitants of a joint and last survivor life annuity with a $750,000 deposit without a guarantee period. They have structured the contract so that Erika will receive $2,500 a month when Russell passes away. During Russell’s lifetime, he receives $5,000 per month for six years. Erika begins receiving $2,500 per month but passes away two months later. How much will the beneficiaries of their estate receive, if any?
a) $0
b) $375,000
c) $385,000
d) $192,500
Both Erika and Russell are insured in the annuity for both of their lives. Since there is no guarantee period added to this contract, upon both of their deaths, there is no residual amount given to either of their estates.
The contract ends at the death of the last surviving annuitant. Guarantees reduce the risk that the initial deposit will not be paid out in part or in full, and therefore, protects the invested capital. A life annuity without a guarantee is a risky investment.
Ref: 3.2.3.2, 3.5.2.1
James has a non-registered accumulation annuity and is surrendering the contract. Select the statement that best represents how the surrender will be taxed.
a) There will be no taxes payable.
b) Tax applies on the investment growth.
c) 100% of the amount received will be taxed.
d) The withdrawal will be taxed at the same rate as interest.
James was already taxed on any deposits that he made into his account because the policy is non-registered. He will only be taxed on the investment growth from his annuity.
If James had withdrawn or surrendered from a registered account 100% of the funds would be taxable at the same tax rate as interest in the year he received the funds.
STUDY REFERENCE:
3.7.4 Tax on surrender
Zahava’s marginal tax rate is 32% and she receives two annuity payments.
The first is a 15-year term with monthly payments of $450 of which $380 is capital. The second is a 20-year term with monthly payments of $370 of which $345 is capital.
How much combined tax will Zahava pay?
a) $364.80
b) $268.80
c) $30.40
d) $1,208.80
To calculate Zahava’s total tax due, first, find the amount of interest she is currently receiving from each of her annuities. Then multiply by her marginal tax rate of 32% and add together to get the total tax.
15-year term
- Find the interest: subtract the capital amount from the payment.
$450 - $380 = $70 - Find the annual interest: multiply the interest by 12.
$70 × 12 = $840 - Find the tax due: multiply by the marginal tax RATE
$840 × 32% = $268.80
20-year term
- Find the interest: subtract the capital amount from the payment.
$370 - $345 = $25 - Find the annual interest: multiply the interest by 12.
$25 × 12 = $300 - Find the tax due: multiply by the marginal tax tax
$300 × 32% = $96
Add together the amount of tax for each annuity.
$96 + $268.80 = $364.80
Ref: 3.7.2.1
Maysen just retired and needs an additional $780 monthly to cover her retirement expenses. She is purchasing an annuity with a rate of $5,000 per $100,000.
How much does Maysen need to deposit to receive the amount she needs?
a) $187,200
b) $9,360
c) $39,000
d) $64,100
Maysen’s additional income should be annualized:
$780 x 12 = $9,360
(deposit amount ÷ 100,000) × $5,000 = $9,360
deposit amount ÷ 100,000 = $9,360 ÷ $5,000
deposit amount ÷ 100,000 = 1.872
deposit amount = 1.872 × 100,000
deposit amount = $187,200
The $780 monthly additional income must be annualized. This gives us $9,360 per year that the client will need. $9,360 divided $5,000 gives a factor of 1.872. Multiply 1.872 times $100,000 we get $187,200.
Ref: 3.5.1
Darinka purchases an insurance product and she receives a number of units based on her initial deposit. She chooses an investment mix of the TSX index fund based on the units’ value and selects only to increase income payments if they surpass a 3% rate of return. If the value of the units falls, the income falls. If the value of the units increases, the income increases. What type of insurance product does Darinka own?
a) Variable annuity
b) Variable universal Life
c) Non-par whole life
d) Indexed income annuity
Darinka owns a variable income annuity, which is an immediate life annuity that allows the annuitant the ability to earn returns that are linked to the market. The variable income is based on the annuity units, which are determined by the initial deposit made. The contract owner has the right to choose their own investment mix for the annuity unit(s) value, as well as the benchmark rate of return that determines if income payments would be increased.
Ref: 3.4.5
Tony purchases a term-10 life annuity for $500,000 with a return of premium guarantee. The monthly income is $4,300. He has his spouse listed as the beneficiary. Unfortunately, after Tony has put the annuity contract in force, but before he receives the first payment, he passes away. What will his beneficiary receive, if anything?
a) $500,000
b) $495,700
c) $51,600
d) $504,300
Tony’s beneficiary is entitled to receive 100% of the $500,000 deposit because his annuity contract has a return of premium rider. This rider ensures that the full deposit is paid to the beneficiary if the annuitant dies before the first payment.
Ref: 3.5.2.3
Which of the following statements is true regarding a Market Value Adjustment (MVA) when a withdrawal is made from an accumulation annuity?
a) An MVA only applies if the annuity has reached its maturity date.
b) An MVA is a penalty based on time, interest rates, and expenses.
c) An MVA does not include any expenses incurred by the insurer.
d) An MVA is only charged when a withdrawal is made from an interest-bearing investment option.
Withdrawals can only be made from an accumulation annuity.
When a withdrawal is made, a market value adjustment (MVA) may be charged. The MVA is a penalty calculated by the insurer that has issued the contract. When a withdrawal is made by the contract owner, the agent must inform them that a withdrawal may be reduced by the MVA.
The MVA is based on time, interest rates, and expenses.
The time is the difference between the time of withdrawal and the maturity date of the investment. The interest rate factor looks at the guaranteed interest rate and the interest rate in effect at the time of withdrawal. Expenses are the costs incurred by the insurer.
All withdrawals from an accumulation annuity will change the amount available to fund annuity payments if it is converted to a payout annuity upon maturity.
STUDY REFERENCE:
3.6.3.1 Withdrawals
Bara, age 72, holds a locked-in retirement savings plan (LIRA) from a previous employer and would like to transfer its value to an annuity so that she can expect regular income for herself and her spouse Lisbeth. What is an appropriate annuity option to suggest to Bara if she were your client?
a) Joint and last survivor life annuity
b) Single life term-20 immediate annuity
c) Joint and last survivor term-20 annuity
d) Single life immediate annuity with a guarantee
When transferring registered funds to an annuity, you can only select either a life or term-90 (T-90) annuity. When a spouse transfers locked-in savings from a LIRA to fund an annuity, they must acquire a joint and last survivor annuity.
The goal of this is to ensure that if a pensioner passes away before their spouse, the surviving spouse would continue to receive an income.
As such, the only possible options for Bara to transfer her LIRA to an annuity is either a joint and last survivor life or T-90 annuity. Presented with the options above, only join and last survivor life annuity is an appropriate recommendation.
Ref: 3.3.1.1
Juan, age 68, receives an inheritance of $1,000,000 from his aunt. He is a spendthrift and is risk-adverse, so his financial advisor suggests an annuity. Juan wants the money in the annuity to accumulate some interest and to be distributed regularly and tax-efficiently in a predictable amount. Juan is retired and has some savings, so he will not need the income from the annuity for a few years. What is the most appropriate annuity to recommend to Juan?
a) Deferred payout life annuity
b) Deferred accumulation life annuity
c) Immediate payout annuity
d) Variable life annuity
At a foundational level, there are two different types of annuities—payout annuities and accumulation annuities. The most typical annuity is a payout annuity where an individual, known as the annuitant, receives a regular payment from a lump sum of capital invested.
An accumulation annuity is not what most people think of as an annuity because it cannot pay an income. It is a term savings vehicle with a maturity date, so it cannot be for “life”.
If someone is looking to receive income, an accumulation annuity is not the right product. The most appropriate product type to recommend to Juan is a deferred payout annuity as he is looking for income, but not right away.
Ref: 3.1.1
Anit has $2,300 of RRSP carry-forward room. His earned income reported on last year’s tax return was $52,000.
How much can Anit contribute to his RRSP this year?
a) $2,300
b) $7,060
c) $9,360
d) $11,660
Anit has $9,360 of contribution room this year based on 18% of $52,000.
Income × 18% = RRSP contribution room
52,000 × 18% = $9,360
He also has $2,300 of unused room.
$9,360 + $2,300 = $11,660
Therefore, Anit can contribute $11,660 this year to his RRSP.
STUDY REFERENCE: 4.7.1.1 RRSP eligibility and contributions
Zsuska is having trouble covering her expenses and regularly needs to withdraw extra money from her investments.
Which of the following will help determine the cause of Zsuska’s money issues?
a) Net worth statement
b) Cash flow statement
c) Income statement
d) Capital deficit statement
It seems like Zsuska is spending more money than she has. To confirm this, her advisor will need to analyze her cash flow statement. The advisor will be able to see all sources of net income (including her income after income tax) as well as all expenses including debt payment for liabilities and potential child and spousal support.
The cash flow statement can be developed for a period of time as long as a year or as short as a month. It is most accurate when it is backed up with a budget based on actual spending patterns.
If a positive number results, Zsuska has money available for expenditures, savings, or investing. If a negative number results, she might need a debt management solution, savings may have to be used, or assets may need to be sold to pay down debt.
With a clear understanding of Zsuska’s expenses and earnings, her advisor will be able to give her the best possible solution.
STUDY REFERENCE: 4.1.3.2 Cash flow statement
Sonia’s employer offers a retirement plan in which Sonia must contribute 5% of her salary and her employer makes a matching contribution. Contributions from employees and the employer are mandatory. She is offered a list of different investment options, but since she does not know what to choose, she selects the default option. Although she knows how much goes into her retirement plan, she does not know how much income she will receive in retirement.
What type of retirement plan does Sonia have with her employer?
a) Defined contribution pension plan
b) Defined benefit pension plan
c) Group registered retirement savings plan
d) Pooled registered pension plan
Sonia has a defined contribution pension plan (DCPP) with her employer, where the contributions are clearly defined and mandatory, but the retirement benefits are not known since they will depend on how much money is accumulated in her plan. In the DCPP, she can also make her investment decisions or choose a default option.
While a pooled registered pension plan (PRPP) is similar to a DCPP, one of the main differences is that employee and employer contributions in a PRPP are not mandatory.
Contributions are also not mandatory in a group registered retirement savings plan (group RRSP).
As for the defined benefit pension plan (DBPP), it is the retirement benefit that is known in advance and the plan members do not make investment decisions.
Ref. 4.5.2
Dennis and Marie are married. Dennis is 76 and Marie turns 71 this year. Dennis opened a spousal RRSP in Marie’s name several years ago and tries to contribute annually.
What date represents the last date that contributions can be made to Marie’s spousal RRSP?
a) Dennis’ 71st birthday
b) Marie’s 71st birthday
c) At the end of the year that Dennis turned 71
d) End of this year.
Contributions to a spousal RRSP can be made until the younger spouse reaches the end of the year in which she turns 71, at which time his RRSP matures. Since Marie turns 71 this year, contributions can be made until the end of this year.
The taxation of withdrawals from a spousal RRSP are dependent on the date of the withdrawal in relation to the contribution. Based on the date, withdrawals might be attributed to the contributor, Dennis, and will be included in his income and taxed accordingly.
Ref: 4.7.1.2
Byron currently earns an annual income of $110,000. His company contributes 5% of his salary to the company’s group RRSP and in June, he also contributed $2,000 to his personal RRSP. He has not used the one-time over-contribution amount.
If Byron has no carry-forward room from previous years, how much more can he contribute to his RRSP without penalty?
The annual contribution limit is 18% of the income for the previous year, or the maximum dollar limit established for the year.
- To calculate Byron’s contribution room for this year, multiply his income from last year by 18%: $110,00 × 18% = $19,800
In addition to the sum that can be contributed to an RRSP annually, Byron could use carry-forward contribution room that was created by not making the maximum contribution in previous years. If Byron had carry-forward room, we would add this amount to the contribution room for this year.
Add and/or subtract the carry-forward room from previous years and contributions made already this year. In this case, there is no carry-forward room, but we do have contributions made by both Byron and his company.
Company’s contribution: $110,00 × 5% = $5,500
Byron’s contribution: $2,000
- Subtract the amounts already contributed to registered accounts this year:
$19,800 - $5,500 - $2,000 = $12,300
A one-time over-contribution of $2,000 is also permitted. The over-contribution is not tax-deductible and grows on a tax-deferred basis. If Bryon over-contributes more than the permitted $2,000, a 1% penalty tax is applied monthly against the excess contribution.
Don’t forget to add the $2,000 if it has not been used! Students often forget about this one-time over-contribution.
- Add the one-time over-contribution of $2,000.
$12,300 + $2,000
= $14,300
Ref. 4.7.1.1
Carlos is 65 years old and currently considering whether he wants to receive his Old Age Security benefit now or wait until he turns 69 years old. If he decides to start receiving his OAS this year, he will receive $613.53. How much would Carlos receive if he waited until he turns 69?
a) $790.23
b) $717.42
c) $834.40
d) $926.49
For every month that Carlos defers his OAS pension, it will be increased by 0.6% per month, or 7.2% a year. The maximum anyone can defer a pension until is age 70, where it would increase by 36% (7.2% x 5).
- To calculate Carlos’ possible increase in OAS benefits, start by multiplying the monthly increase of (0.6% x 12) 7.2% by the number of years that he will defer:
7.2% × number of years
= 7.2% × 4 years
= 28.8% - Multiply the amount that Carlos will receive if he chooses to start his OAS benefits at age 69.
28.8% × $613.53
= $176.70 (rounded off) per month. - Add together the pension amount that Carlos is eligible for at age 65 and the increase he would receive by deferring to age 69.
$613.53 + $176.70
= $790.23 per month.
Ref. 4.4.1.3
Prerna is an ETF specialist and she really loves her job. She just turned 65, and rather than retiring, she has decided to wait until age 69. She believes that in four years her team will be able to manage without her and she will be able to retire stress-free. If Prerna were to retire today, her CPP income would be $678.40.
How much more CPP income will Prerna receive when she retires?
a) $227.94
b) $195.38
c) $284.93
d) $244.22
Prerna’s CPP income will be increased because she has decided to delay her retirement for four years. Many consider delaying CPP pension to be a benefit because their monthly income is increased by 0.7% for each month it is delayed. The latest that Prerna can take her CPP is age 70. At 70, her CPP will be increased by the maximum percentage of 42% or 8.4% annually for 5 years.
Prerna has decided to delay her CPP four years and she would have received $678.40 at age 65. Prerna’s CPP income will be increased by $227.94 for a total of $906.34.
Calculate the increase to Prerna’s CPP:
CPP income = 8.4% × number of years × CPP at age 65
CPP income = 8.4% × 4 × $678.40
CPP income = $227.94
For this question, you do not need to calculate the total CPP income. If you did, it would be done as follows:
Add the increase to the amount of CPP Prerna would have received at age 65.
$678.40 + $227.94 = $906.34
Ref. 4.4.2.3
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)
Dan owns a patent to a bike helmet that is manufactured and sold by Gears Inc. What type of income does Dan earn in this scenario?
a) Rental income
b) Royalty income
c) Business income
d) Employment income
Since Dan owns the patent to the helmet, he earns royalty income for the prouduct.
Individuals can earn income in a variety of ways. Anything that a person owns that has a cash value or can be sold is considered an asset. All these assets hold value or worth and contribute to the positive side of a balance sheet.
Assets include:
Investments
Home (primary residence)
Art and fine jewelry
Vehicles
Real Estate and rental income
Ownership shares in a business
Patents or intellectual property that receive royalty income
All assets are compiled and included in a financial review.
STUDY REFERENCE:
4.1.1.7 Other asset sources
Dagmar has earned $150,000 annually for the past 5 years and her husband Ramy is self-employed. In retirement, she will be receiving a company pension while Ramy will not. Currently, Dagmar has:
$3,400 in carry-forward contribution room from previous years
5.5% of her base income contributed to a registered account by her company
$10,000 of personal contributions to her RRSP
$4,600 contributed to Ramy’s spousal RRSP
Already over-contributed $2,000 to her RRSP
Based on her investment activity this year, what is Dagmar’s contribution room?
a) $7,550
b) $9,550
c) $27,000
d) $30,400
The annual contribution limit is 18% of the income for the previous year, or the maximum dollar limit established for the year.
- Calculate Dagmar’s contribution room for this year. Multiply her income from last year by 18%.
$150,000 × 18% = $27,000
In addition to the sum that can be contributed to an RRSP annually, Dagmar could use carry-forward contribution room that was created by not making the maximum contribution in previous years.
- Add and/or subtract the carry-forward room from previous years and contributions made already this year.
RRSP carry-forward: $3,400
ADD carry-forward: $27,000 + $3,400 = $30,400
Company contribution:
$150,000 × 5.5% = $8,250
Dagmar’s personal contribution: $10,000
Dagmar’s contribution to Ramy’s spousal RRSP: $4,600
SUBTRACT contributions: $30,400 - $8,250 - $10,000 - $4,600 = $7,550
A one-time over-contribution of $2,000 is also permitted. The over-contribution is not tax-deductible and grows on a tax-deferred basis. If Dagmar over-contributes more than the permitted $2,000, a 1% penalty tax is applied monthly against the excess contribution. In this situation, Dagmar has already contributed so she cannot contribute an additional $2,000.
Don’t forget to add the $2,000 if it has not been used! Often students forget about this one-time over-contribution.
Ref. 4.7.1.2
Suresh and Leena have been married for 40 years when they were 32 and 27 respectively. Suresh is still working and earns an employment income along with annual withdrawals from an RRIF. He is concerned about minimizing the amount of tax he has to pay.
Which of the following will allow Suresh to minimize his taxes?
a) Basing his RRIF withdrawals on his wife’s age
b) Making his wife beneficiary to the RRIF
c) Delaying his RRIF income until he retires
d) Directing his RRIF income to his TFSA
Suresh is over the age of 71 and must withdraw the minimum amount from his RRIF. Based on his age the minimum withdrawal is 5.3%. This amount will not be subject to any withholding tax, but any amount over the minimum withdrawal is subject to withholding tax.
As with any registered account, RRIF income is taxed fully. Suresh does have the option to direct his withdrawals to his TFSA, but regardless of how the withdrawal is made, it will be included in his income and taxed accordingly.
Suresh has the option of using his wife’s age to calculate his minimum withdrawal. Since his wife is younger, he will be able to decrease his withdrawals and keep more money in his RRIF. This will also decrease the amount of income he is receiving annually and, therefore, the amount of tax he is paying.
Ref. 4.7.2
Kara is investing her inheritance in a segregated fund. Her advisor gave her a list of recommendations with the fund details. Kara is more comfortable investing in funds with a long history because she believes she can see how they will react to various market conditions.
Of the information Kara was given, which of the following represents the date the segregated fund started?
a) The date the fund manager was assigned to the fund
b) The date the MER was established
c) The date on which the fund began operations
d) The date of the first investment into the fund
Kara needs to look for the date that the fund started operations.
This date is the fund’s date of inception. Funds with longer histories have experienced various market conditions and have more reliable performance data. This can reassure investors like Kara; she will have more records to assess the fund’s overall performance. Kara will be able to see historical lows and highs, and the fund’s performance in various market conditions.
STUDY REFERENCE: 5.2.11.5 Date of inception
Usman is a very conservative investor and is unsure of the best product in which to invest a $50,000 inheritance. During a meeting with his advisor, Usman explains his needs: he should be able to withdraw funds or surrender his contract anytime and is not concerned about an income stream but wants to have guaranteed investment growth.
What should his advisor recommend?
a) An accumulation annuity
b) A payout annuity
c) A deferred annuity
d) A TFSA with a mutual fund investment
Since Usman is not seeking income and has a conservative risk tolerance, an accumulation annuity is a suitable recommendation.
An investor seeking income, in a relatively straightforward product, is a likely candidate for a payout annuity. Those looking for a very conservative non-income paying investment without the limitations of segregated funds, such as the 10-year term-to-maturity, sales charges, and annual MER, will be potential candidates for an accumulation annuity.
An accumulation annuity is recommended when the analysis indicates the suitability of an investment-return approach. It permits both withdrawals, subject to minimum and maximum amounts, and surrender.
Ref: 5.3, 3.2.1.2
Eric is illustrating several recommendations for his client. He knows there are set guidelines he must follow to compare historical performance data for a segregated fund.
Which of the following examples is illustrated correctly?
a) Contract A with a 75/75 guarantee and an average return of 7.4%; the value of a $1,000 investment over a ten-year period, with the annual returns displayed as a chart highlighting the years of both negative and positive performance.
b) Contract B with an average return of 7.4% for the past year and an overall average of 4.5%; the value of a $100 investment over a five-year period, with the annual returns displayed as a chart highlighting the years of negative performance.
c) Contract C with performance stated as an overall return; the value of a $15,000 investment over a twenty-year period, with five returns displayed as a chart highlighting the years of positive performance.
d) Contract D with several guarantees and an average return of 7.4% for the past year and an overall average of 4.5%; the value of a $20,000 investment over a five-year period, with the annual returns displayed as a chart highlighting the years of negative performance.
When illustrating segregated funds, Eric must ensure certain requirements are met. He must:
- State performance as both an average return and year-by-year return.
- Use $1,000 as the amount invested for each recommendation.
- State the basic guarantees of the contract. For example: a 75% maturity and/or a 75% death benefit.
- Show the value of the $1,000 investment and its annual average return as a percentage for the years illustrated
- Ensure the year-by-year returns show the fund’s annual performance and are displayed in chart format
- Divulge the number of years of positive performance and negative performance. For example, the fund was up in value for six years and down in value for four years.
STUDY REFERENCE:
5.2.11.6 Performance data
Eva invested in segregated funds and holds 112 units of ABC Segregated Fund with a NAV of $14.75. This year Eva’s investment was divided from 112 units into 224 units.
What is the new market value of Eva’s investment?
a) $8,26
b) $1,652
c) $2,625
d) $3,304
To calculate the new value of Eva’s investment, multiply the NAV by the number of units held.
112 units × $14.75 = $1,652
Eva’s segregated fund may be divided many times over its lifetime. Regardless of the number of times her units are divided, the market value of her investment will not change. However, when the fund was divided, the value of each unit decreased.
The opposite is also true: if her fund is consolidated, the unit value will increase. Either way, the market value of Eva’s investment will not change.
STUDY REFERENCE: 5.2.11.4 Fund units, net asset value per unit and market value
Tiffany is comparing funds and their fees. She would like to calculate the MER for each fund.
What information does she need from the Fund Facts document?
a) The total value of the fund
b) The fund’s date of inception
c) The number of units outstanding
d) The number of years the fund has been available
To calculate the MER, Tiffany needs the total value of the fund. This dollar figure, shown in the Fund Facts document, reveals how much is invested in the fund. Funds with a higher total value can potentially offer a lower MER. This benefits the investor since the MER erodes returns.
The MER is a percentage of the management and operating expenses relative to the average of the fund’s assets. The MER is not based on a fund’s performance and it can be changed. Trailing commissions are also included in the MER.
STUDY REFERENCE:
5.2.11.3 Total value of fund
Jean, an investment specialist, is explaining the benefits of annuities to the members of the local chapter of the Lions Club. They discuss the possibilities of customizing an annuity contract to suit the needs of the policy owner.
Of the following members attending the information session, who would be best suited to include the guarantee period of a life annuity?
a) Kelly, who has a low risk tolerance and would like her husband to be paid the balance of the guarantee as her named beneficiary in the event of her death.
b) Simon, who wants to maximize his income for a guarantee period of 10 years because he needs the extra income to travel the world before his cancer diagnosis shortens his life.
c) Mary, who has a high-risk tolerance and wants to guarantee she will receive the total amount of the sum she paid to Sagicad during her lifetime.
d) Olivia, who has a high-risk tolerance and does not care about immediate returns. She would like her annuity to continue to register high returns for her entire life as the guarantee resets each time the annuity grows.
The guarantee period of a life annuity minimizes Kelly’s investment risk. If she dies during the guarantee period, the balance of the guarantee will be paid to her husband, the beneficiary.
Having this longer guarantee provides a minimum return from the investment and helps address Kelly’s lower risk tolerance. It produces a lower-income payment to the annuitant and must be balanced with the likelihood of Kelly’s husband receiving a payment when she dies.
It is important to remember that a higher risk tolerance may indicate a shorter guarantee period. The shorter guarantee period rewards the annuitant by making higher payments but puts the beneficiary at risk since he may receive nothing if the death of the annuitant occurs after the guarantee period ends.
Ref. 5.4.4.1
Mark, an advisor, meets with his client, James, and needs to find the best investment vehicle for him. James explained his investment requirements, and Mark has a wide selection of funds to recommend. Mark is following his responsibilities as an advisor by doing all the following, except:
a) choosing a segregated fund from the list of funds supplied by his mentor, Edward, two years ago, as they have already been properly analyzed.
b) affirming that his analysis and recommendation are not based on the rate commission or trailer fees offered by the fund.
c) obtaining approval from his compliance officer before presenting any third-party sources of information to the client.
d) explaining that the advice being given could be factual or his own opinion.
Mark has 5 responsibilities when choosing a segregated fund for his client:
- Staying up to date on new fund introductions and other similar developments through various industry channels. This could be done by reading industry journals and marketing materials provided by the fund company. Meet with fund wholesalers for their input. Mark should not recommend funds based on just his standard list.
- His analysis and recommendations should not be based on the rate of commission or trailing fees offered by the fund. He needs to base his recommendations on only client suitability.
- Mark’s analysis needs to be based on current information, and it should be provided to the client in a timely fashion. Each insurer provides information the funds they provide, and Mark can choose to include information with his own research.
- Anything found on the Internet, including third-party sources of information needs to be verified and double checked for accuracy. Mark can also speak his compliance officer before presenting any additional information to the client.
- The recommendations and information Mark shares will likely be both fact-based and opinion based. It’s important that he is clear about which information is factual and which is his opinion.
Ref. 5.1.1
Susan is completing several segregated fund transfers for her clients.
Which of the following scenarios is accurate?
a) Victoria has decided to transfer her registered segregated fund account with UNO Financial to another company, CRZ Returns, where she has a registered account. The new contract will be tax deferred.
b) Ronaldo has transferred $25,000 from his registered retirement segregated fund account to his tax-free savings account. His TFSA contains segregated funds and so he will not have any penalties since they are both segregated fund accounts.
c) Jones has non-registered segregated funds which contain 80% of his portfolio and they cannot be transferred into registered retirement savings plan without tax penalties.
d) Emery transfers out his $10,000 75%/100% segregated fund investment at maturity valued at $9,000 and received his original investment amount.
Victoria’s money is being transferred from a registered investment account to another registered investment account. Since the registered account is the source of transferred money, then her contract will be set up as another registered account to continue its tax deferral. She will not be penalized for this transfer. The transfer is initiated by the firm that will be receiving the money.
Ronaldo is transferring money from a registered retirement account to a TFSA. He will have to pay taxes on this transfer. While a TFSA does have tax advantages, it does not offer a tax-deferral benefit. His withdrawal will be included in his income for that year.
Jones can transfer his non-registered segregated fund to a registered segregated account. This transfer will reduce his income for that year. The only restriction on his transfer will be his contribution room. Jones cannot over-contribute to his registered account.
Only 75% of Emery’s segregated fund is guaranteed at maturity. If the value of his investment has decreased, he will receive the 75% guarantee or the current value of his investment, whichever is more. In this situation, Emery will only receive the $9,000 market value.
It is important to remember that locked-in funds must be transferred to a locked-in segregated fund account. Non-registered funds can be transferred into a registered retirement savings plan (RRSP) account or a tax-free savings account (TFSA) and will be a counted as a contribution for the year. Enough contribution room must be available. If available contribution room is exceeded, tax penalties will apply.
Ref. 5.2.2.2
Angela is working with her advisor to make sure her retirement income meets her needs. She has several registered accounts that she will need to transfer to start receiving an income. She has decided that annuities will give her the security that she is looking for, but she is concerned about potential interest rate risk.
Which strategy is the most appropriate to help Angela manage interest rate risk?
a) Laddering
b) Indexed Annuity
c) Prescribed Annuity
d) Return of Premium Guarantee
The main risk of an annuity is the potential changes in interest rates. Annuity rates reflect the current market and so if interest rates increase, annuity rates also increase. Once an annuity is in place, the rate is set and a higher rate is unavailable for that contract.
Angela can use a laddering strategy to help manage some of this risk. To apply a laddering strategy, a series of annuities are purchased over several years. Each annuity will have a rate that aligns with interest rates at the time of purchase. By doing this, Angela’s investments will not be tied to just one annuity rate.
STUDY REFERENCE:
5.4.5 Principal risks of annuity recommendation
Jeannie invested in a segregated fund for estate planning purposes. She would like the funds to be part of the inheritance she leaves for her children.
Which of the following benefits is important for Jeannie’s estate planning purposes?
a) Resets
b) Probate bypass
c) Maturity Guarantee
d) Creditor protection
While all the options are all benefits of a segregated fund, the most important benefits for Jeannie are the estate planning benefits. Segregated funds are considered an insurance product and therefore some of the same benefits apply.
With segregated funds, one can:
- Name a beneficiary for contracts
- Bypass probate
Both these benefits will ensure that Jeannie’s children will receive their inheritance and the funds will not be subject to any probate fees.
STUDY REFERENCE:
5.1.2 Supporting the segregated fund recommendation
Lisa is traveling around the world and does not want to worry about her expenses at home. She has very high-income needs. Her advisor has recommended purchasing an annuity.
Which of the following annuities is the best option for Lisa?
a) Bridge term annuity
b) Short term-to-maturity annuity
c) Short accumulation-to-maturity annuity
d) Deferred life annuity
Lisa needs a short term-to-maturity annuity. Short term-to-maturity annuities offer clients a higher income because the payments are made over a short period. Lisa will receive a much higher income with a short-term annuity than with a longer term.
5.4.1.2 Maturity Date
