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Life License > Module 8 > Flashcards

Module 8 Flashcards

1
Q

What is segregated fund?

A

Investment product from insurance companies, separated from general policy reserves. Invests in stocks, bonds, tbills, real estate, pref shares. NOT IN GICs

Individuals do not directly own/invest in segs.

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2
Q

What is a deferred annuity and how are they taxed?

A

Can hold either GDAs or Seg Funds. Investment account.

Can name a beneficiary. Protected from creditors. Estate is taxed on cap gain, inherits full value.

Can rollover to a payout annuity at a fixed rate. 10% commission free withdrawals.

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3
Q

What are the two types of guarantees?

A

Death benefit: Fund pays greater of fund fair market value/ 75% of all invested money.

Maturity Guarantee: Pays greater of fund’s fair market value/book value of investment (day 1 investment).

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4
Q

What are the two types of guarantee adjustments?

A

Linear: initial deposit - withdrawal * rate

Proportional: 1- (withdrawn/original units)* original guarantee in dollars.

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5
Q

What is reset guarantee?

A

Allows policy owner to reestablish the principal at the current fair market value. Limits to how many times. Restarts the maturity period.

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6
Q

What is creditor treatment of seg funds?

A

Interests of the PREFERRED BENEFICIARY are protected from creditors even in bankruptcy. Bypasses probate.

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7
Q

How are acquisition fees taxed?

A

Treated as a capital loss at deposition. Not deductible when paid. Include front end loads, back end,.

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8
Q

Documentation wise, how are seg funds handled?

A

Information folder is the disclosure document. Must be prepared for all IVICs. Must be delivered BEFORE the client signs.

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9
Q

What are the main differences between seg and mutual funds?(guarantees)

A

Guarantees: 75%-100%, maturity, book value vs. none

company vs. equitable interest.

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10
Q

What are the main differences between seg and mutual funds? (Ownership)

A

Ownership: No ownership rights, owns units from insurance

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11
Q

What are the main differences between seg and mutual funds? (Valued)

A

Valued: End of month, but usually end of day. vs. End of day, NAVPS (Ta-Tl/Shares)

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12
Q

What are the main differences between seg and mutual funds? (regulation)

A

Regulation: Insurance council in various places, given contract before sale. vs. provincial securities regulators, prospectus given 2 days after the sale, filed with province.

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13
Q

What are the main differences between seg and mutual funds?

Earnings

A

Earning based on length of time policy owner has interest during the year. vs. End of year distribution.

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14
Q

What are the main differences between seg and mutual funds? (creditor protection, estate and choice)

A

Preferred beneficiaries are protected vs. no protection

In estate planning, becomes parts of the estate for mutual.

More mutual fund choices, broader choice of investment types and investment managers.

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15
Q

Fund taxation happens in what ways?

A

Capital gains : 50%
Interest: 100%
Rental Inc: 100%
Dividends: Grossed up 144% taxed at marginal tax rate. Credit of 17.97% times grossed up amount.
Seg funds: Capital losses credited at 50%

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16
Q

What is included in Management Expense Ratio (MER)?

A 
Portfolio management fees
Interest Charges and Taxes
Audit
Legal
Accounting
Fees to maintain records
Higher in IVICs
Significant Cost
17
Q

What are the different funds fees/commission fees?

A

Front-end: paid on deposit %. 10000*(1-0.04)
Back-end: Paid on deposition, % of initial deposit on cash out.
DSCs: Paid on cash out, % that goes down over time.

18
Q

Types of Investments

A

Debts: Loans to other, corporations, government, to cities. Short term- TBills, Long term- GICs, Mortgage, Bonds.

Equities: Ownership, shares in companies - common/preferred.

Option: Calls and puts, agreements to buy or sell at a set

Commodities

19
Q

What are the different money market investments and their risk profiles?

A

T-Bills - Low Risk, interest taxable in year earned.

Mortgages - Insured by CMHC, Interest rate risk. Good for low risk, monthly income.

20
Q

What are the types of guaranteed investments and their risk?

A

Banks/Trust: GICs, Term Deposits, CDs. Protected by CDIC

Insurers: GDAs, protected by Assuris.

Illiquid. If cashed early subject to: Market rate corrections if they went up, interest rate (term rate corrections), Admin fees and penalties.

21
Q

What is a longer term financial instrument?

A

Bonds up to 30 years. Fixed-income instruments, pays steady stream of interest income semiannually.

Has a term, face amount, interest rate paid, collateral (otherwise a debenture)

22
Q

What are the risk profiles of different bonds?

A

Federal- Marketable and Interest Rate risk.
Canada Savings bonds - Named, non-marketable, can be cashed at any time, very liquid. No interest rate risk.
Municipal: Tax free in the states, we pay tax in canada.

23
Q

What is yield to maturity?

A

The rate of return if the investor held the bond until maturity. Takes into account the price, payments, time remaining, maturity value, time between interest payments.

24
Q

What is after tax yield?

A

Pretax * (1-tax rate)

25
Q

What is time value of money and the rule of 72?

A

A dollar today is worth more than a dollar next year due to inflation. Money invested today will compound to be worth more.
Rule of 72: Money will double in value in a certain number of years. divide 72 by the current interest rate.

26
Q

What is the common share, a preferred share and a derivative?

A

Common share - bought and sold on market. Voting rights. Share of company.
Preferred Share - rights to dividends first, no voting right, cumulative.
Derivatives: Derived from some other unlying item of value. Highest risk is commodities. Can’t hold in RRSPs.

27
Q

What are the three categories of funds? What risk are they susceptible to?

A

Income funds: Money market, Mortgage, Bond, dividend. INTEREST RATE RISK
Growth Funds: Equity, Index, International and global funds, Speciality, Real Estates MARKET RISK
Combination of Funds: Balanced, Asset Allocation. Returns interest and cap gain. AA funds have variable risk profile at discretion of a fund manager.

28
Q

Lowest to highest risk for funds:

A

Money Market, Mortgage, Bonds, Balanced, Dividend, Equity, International, Speciality.

My mother buys bad dogs even in spring.

Non generic: Hedge, LSIF, Commodity.

29
Q

What are the benefits of an Index Fund?

A

Match performance of an index. Passive, low MER, Invests in blue chips. Pays dividends. Commodity fund - needs license.

30
Q

What are the 9 types of investment risk?

A

Inflation, Liquidity (Marketability), Default, Business, Currency, Interest Rate, Reinvestment, Market, Leverage

Life License (6 decks)

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