EXAM PRACTIVE QUESTIONS 4 Flashcards
Jerry, single and aged 67, is retiring from his employer and needs to move his funds from his employer’s Defined Contribution Pension Plan so he can start receiving an income. Jerry would like to minimize market risk, but also wants to maximize the ongoing income amount. Which of the following is best suited to Jerry’s objectives?
a) T-90 annuity
b) Life annuity
c) Life Income Fund (LIF)
d) Prescribed Retirement Income Fund (PRIF)
The T-90 annuity removes all market risk and, given that there is a defined end date, the payment from a T-90 annuity will be greater than the life annuity.
Ref: 3.3.1.1
Ethan invested $50,000 in segregated funds which was a 10-year term contract that offers a 75% maturity guarantee and a 100% death benefit guarantee. Three years later, he decides to surrender the contract as he is in need of the funds. How much does Ethan risk losing by surrendering the contract before its maturity date?
a) $50,000
b) $37,000
c) $12,500
d) $0
While segregated funds are a relatively lower-risk investment, at contract maturity an investor still risks the loss of up to 25% of his investment, the difference between the amount invested and the minimum maturity guarantee. Prior to contract maturity, an investor can lose up to the sum invested since the maturity guarantee does not apply. Hence, Ethan can lose up to $50,000, which is the total amount he had invested.
Ref: 1.3.1.5
Sheena is 68 years old and is a Canadian citizen. She has lived in Canada for the last 27 years and she recently moved to Germany to live there with her daughter. Sheena has never been employed and had been totally dependent on her spouse, Gibran, who passed away a year ago at age 73. Gibran was a pensioner and was eligible for the Guaranteed Income Supplement (GIS) benefit. In this case, which of the following statements is true about the pension/allowance Sheena is eligible to receive?
a) Sheena is eligible to receive the old age security (OAS) pension even while living outside Canada.
b) Sheena is not eligible to receive any of the government offered pensions as she is neither employed nor residing in Canada.
c) As her spouse Gibran was eligible for GIS, Sheena is now eligible to receive the GIS allowance as a survivor benefit.
d) Sheena will stop receiving the old age security (OAS) pension if she stays outside Canada for more than six months.
Sheena is eligible to receive the old age security (OAS) pension even while living outside Canada. To be eligible to receive the OAS pension while living outside Canada, an applicant must be 65 or older, be a Canadian citizen or a legal resident on the day before leaving Canada, have resided in Canada for at least 20 years after turning age 18. Sheena will not receive the GIS survivor allowance as she does not reside in Canada.
Ref: 4.4.1.1
Pinky invested $5,000 in a segregated fund A with a MER of 4.3% which had a rate of return of 13.3%. She also invested $5,000 in another segregated fund B with a MER of 2.3% which had a rate of return of 7.3%. Which of the following is true about Pinky’s investments with regard to the MER?
a) Fund A is growing at a better rate though it has a higher MER.
b) Fund B is more profitable for Pinky as she was charged less for MER.
c) The MER value does not impact the return on investment.
d) The MER charged for fund A is higher due to its higher performance.
Fund A is growing at a better rate though it has a higher MER.
Fund A: The real rate of return, before MER, is 13.3% (9.0% + 4.3%). The fund manager earns 13.3%, keeps 4.3% and pays Pinky 9.0%.
Fund B: The real rate of return, before MER, is 7.3% (5.0% + 2.3%). The fund manager earns 7.3%, keeps 2.3% and pays Pinky 5.0%.
MER is not based on performance and it is charged regardless of performance. MERs vary between funds and have a financial impact because they reduce the return on investment. The higher the MER, the greater the reduction in return to the investor. However, if a fund with a higher MER performs much better than a fund with a lower MER, the investor may quite happily pay the higher MER since his investment is growing at a better rate.
Ref: 5.2.10
Kevin will be 71 years old this year and understands that he must convert his RRSP that is currently valued at $625,000. He is still working on a contract basis, and will continue to do this for the foreseeable future. He does not require the income right now and would like to defer drawing income for as long as possible. Given his family history, he is expecting good longevity. Identify the strategy that will minimize longevity risk and allow for maximum payment deferral.
a) Deposit $150,000 in an ADLA and transfer the remainder to an RRIF and only draw minimum payment.
b) Transfer the entire balance to an RRIF and only draw the minimum payment.
c) Deposit the entire balance to an ALDA and defer the payments until age 85.
d) Deposit 50% in an ALDA and the remaining 50% to an RRIF and draw the minimum payments from each.
A lifetime limit of 25% of the value of the qualifying plan, to a total of $150,000 applies to ALDA purchases. The ALDA has the ability to defer payments until the end of the year in which the annuitant reaches 85. Therefore, the ALDA addresses longevity risk and ensures that investors with an RRIF do not deplete their savings prematurely during retirement.
Ref: 3.9.1
Sridar is 65-years old and he uses all of the funds in his locked-in pension to purchase a single 20-year term annuity. His family includes his wife, Neha, son, Pranav, and daughter, Deepti. In the annuity contract, he names Deepti as the irrevocable beneficiary and Pranav as the contingent beneficiary. Which of the following statements about Sridar’s annuity contract is true?
a) Sridar’s wife will receive the death benefit if he dies.
b) If Sridar dies, annuity payments will transfer to his wife.
c) Pranav’s beneficiary designation cannot be revoked.
d) Pranav and Deepti are the co-annuitants of the contract.
When some, or all, of the premium is derived from a locked-in pension, all or part of the death benefit may become payable to the spouse instead of the beneficiary. Only in a joint and last survivor annuity, when the first annuitant dies, payments continue or transfer to the co-annuitant, usually the surviving spouse. A contingent beneficiary is always revocable. Pranav and Deepti are not the co-annuitants of the contract.
Ref: 7.2.1.2
Fakir receives an inheritance of $50,000 from his grandad and would like to invest the amount in a segregated fund. He has not invested before and meets with an agent for a suitable recommendation. Fakir is unaware of the risks of investing in segregated funds. How will Fakir be notified about the risks of investing in segregated funds?
a) He will be notified of the risks expressed as a warning on the face page of the contract.
b) He will not be notified of the risks and it is his responsibility to gather details about the investment.
c) He will not be notified as there are no risks associated with a segregated fund investment due to the guarantees.
d) He will be notified of the risks only if he is investing in an equity-based segregated fund contract.
The risks of segregated fund investing are expressed in a warning that appears on the cover or face page of a contract that states in bold type:
“Any amount that is allocated to a segregated fund is invested at the risk of the contract holder and may increase or decrease in value.”
Thus, the investor is alerted to a possible danger.
Reference: 5.2.5
Jackson applied for an accumulation annuity contract through his agent, Idina, and his application was approved. Jackson meets with Idina to make a deposit. Which of the following statements about Idina’s service requirements with handling deposits is FALSE?
a) Idina should provide a receipt to Jackson regardless of the type of deposit made.
b) Idina can accept cash deposits as well as deposits made through a cheque or bank draft.
c) Idina should check if a cash transaction falls under the anti-money laundering legislation.
d) Idina should immediately forward the deposit she received from Jackson to the insurer.
Deposits may be received by the agent as cash, a cheque, or bank draft. All deposits must be handled securely and forwarded to the insurer without delay. Cash deposits may be a transaction that falls under anti-money laundering legislation (Proceeds of Crime (Money Laundering) and Terrorist Financing Act). The agent will be familiar with those rules and follow them closely to ensure compliance. The agent should provide a receipt to the client for any cash he receives as a deposit.
Ref: 7.3.2.2
Lena, age 32, is a young professional. She earns $95,000 a year, has no dependents, and owns a condo with no mortgage. She is a conservative investor and is interested in purchasing a segregated bond fund. She would like to earn a higher return than that provided by a regular bond fund. What bond fund would you recommend for her?
a) Junk bond fund
b) Long-term bond fund
c) Small-cap bond fund
d) Index bond fund
Lena can afford to take some risk as she has no dependents, no liabilities, and a fairly high income. A high-yield bond, also known as junk bond, carries more risk than a regular bond fund, but may also provide a higher return.
Ref: 2.2.2
Jing had purchased a 75/100 $1,000,000 segregated fund contract, which was held in a non-registered account. Jing passed away shortly afterwards. In that time though, the investments in the contract had fallen in value and the market value of the account was $950,000. Assuming that no withdrawals had taken place, how much of the death benefit guarantee should be reported as taxable?
a) $25,000
b) $0
c) $50,000
d) $12,500
f the market value is less than a maturity or death benefit guarantee, a top-up is paid out. When a segregated fund is held in a non-registered account, any amount paid out as a top-up is taxable as a capital gain at 50%. When the top-ups are paid out on registered accounts, they are 100% taxable as ordinary income.
Jing’s $1,000,000 non-registered segregated fund provides a 100% death benefit guarantee, so that even though the market value of his account was $950,000 at the time of his death, he will receive a top-up of $50,000. Fifty percent on that top-up is taxable because it is taxed at the capital gain rate ($50,000 × 50% = $25,000). $25,000 of the death benefit guarantee is taxable.
Ref: 2.4.4, 2.1.1
Antonia, aged 60, deposits $120,000 to a five-year term annuity which pays $2,000 a month. She passes away after receiving the payments for 14 months. Her son, Marek, who was the named beneficiary in the contract, receives $92,000. This method of payment used by the insurer to pay Marek is known as the:
a) capital protection guarantee.
b) instalment refund choice.
c) commuted value of the annuity.
d) cash refund choice.
The capital protection guarantee method pays the beneficiary what remains of the original deposit. In this example, the contract was funded with $120,000 and $28,000 (14 x 2000) had been paid out to Antonia and Marek received the balance amount of $92,000 ($120,000 – $28,000).
Ref: 3.2.3.1
Sylvio is retiring at a time when interest rates are at an all-time low. However, he is extremely risk-averse and does not want to invest any of his savings to be exposed to stock markets. He prefers having a slightly lower income that is safe and predictable, instead of maintaining control of his capital but not knowing for certain if it will last for his lifetime. Sylvio has no desire to leave an inheritance. To complement his CPP and OAS benefits, he has decided to purchase an indexed life annuity with all his savings.
For Sylvio, what is the principal risk linked to his decision to purchase the annuity?
a) Risk of losing an annuity rate that improves in the future
b) Risk of fluctuations due to inflation
c) Market risk due to poor economy
d) Economic risk leading to bankruptcy
Sylvio is purchasing an indexed life annuity, thereby addressing the inflation risk. He is buying only one life annuity with his entire savings, at a time when interest rates are at an all-time low, and the biggest risk for Sylvio is that annuity rates improve and he will not be able to benefit from that. Low interest rates increase the cost of annuities. In other words, you have to pay a bigger premium when rates are low to get the same payment you would get if rates were higher.
Neither market risk nor economic risk affects indexed life annuities, unless a bad economy causes the insurer to go bankrupt. However, life annuity payments are covered by Assuris, should the insurer file for bankruptcy.
Ref: 5.4.5
Rhonda is in the process of setting up a spousal Registered Retirement Savings Plan (RRSP) to hold segregated fund investments. Her husband, John, is named as the contributor.
Which of the following is true?
a) John has ownership rights of the account.
b) John is the annuitant of the account and has the rights to withdraw money from the account.
c) Rhonda is the owner and annuitant of the account.
d) John names the beneficiary of the account.
When a spousal RRSP is set up, the owner and the annuitant is the person who benefits from the deposits to the plan. The person who contributes does not have ownership rights. The owner names the beneficiary of the account.
(Refer to Section 6.2.1.2)
Martin wants to purchase a life annuity that will have the highest initial payout.
Which of the following annuities is best suited to Martin’s needs?
a) Straight life annuity
b) Indexed straight life annuity
c) Enhanced annuity
d) Joint and last survivor life annuity
The straight life annuity is based on the life expectancy of Martin only and will, therefore, yield the highest amount per payment. An indexed annuity will consider inflation, and although future payments will be higher, it will pay a smaller amount initially. An enhanced annuity for those with a shortened life expectancy due to poor health. A joint and last survivor annuity insures two persons and their combined life expectancy will likely be longer, resulting in lower payments.
(Refer to Section 3.1.2.1)
Esther invests $145,000 in a segregated fund contract and names her daughter, Lilly, as the beneficiary. The contract provides 75% maturity and 100% death benefit guarantees. A year later, her contract is reset when the market value is $160,000. A few days later, Esther withdraws $30,000 to pay for an unexpected expense. Two years later, Esther dies when the market value of her contract is $140,000. Assuming no other resets were made, how much death benefit will be paid to Lilly?
a) $140,000
b) $160,000
c) $145,000
d) $130,000
Lilly will receive $140,000, which is the market value of the contract at the time of Esther’s death. The market value of $140,000 is higher than the death benefit guarantee of $130,000 ($160,000 −$30,000 = $130,000). Even though the reset increased the death benefit guarantee to $160,000, the $30,000 withdrawal reduces the death benefit guarantee to $130,000.
The amount received at maturity or death can exceed the guaranteed amount when the market value of the contract is higher than the guarantee. However, if withdrawals are made from the contract, guarantees are adjusted downwards in proportion to the account balance.
The timing of the maturity guarantee can also be affected when reset is used.
Reference: 6.4.3.1
