Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

SEGREGATED FUNDS & ANNUITIES (OFFICIAL LLQP) > OVERVIEW (LLQP Flashcards) > Flashcards

OVERVIEW (LLQP Flashcards)

1
Q

DISCLAIMER

A

THANKS FOR JOINING THIS STUDY METHOD!

▼ Read the following for best results.

  • All the questions and answers are taken from CISRO’s LLQP Life Insurance exam preparation manual.
  • Increase your confidence level in passing your certification and provincial exams by exercising this study method often and frequently!
  • The concepts here are simplified with basic definitions, true or false questions and important “need-to-know” key points to prep you in passing your exams.
  • For effective results, download the app on your phone, study the chapters in order and aim for 90 - 100% on chapter quizzes and mock exams.
  • The reveals (answers) don’t need to be word for word, as long as you understand the main concepts in your own words.
  • If this study method has helped you in any way, feel free to share your comments, reviews and suggestions, I’d love to hear them!
  • Contact me for the full access to all the decks.

Happy studying & good luck!
———————————————————

▼ Contact Information
- Email: Contact@MannyDain.com
- Mobile: 437-335-4710 (What’sApp Canada)
- Manny Dain |Financial Educator

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

If a client decides to invest $50,000 today in an investment that pays 4% annually, how much would this investment be worth at the end of the fifth year?

A

$60,833

End of Year:

  • Year 1 - 1.04 x 50,000 = $52,000
  • Year 2 - 1.04 x 52,000 = $54,080
  • Year 3 - 1.04 x 54,080 = $56,243.20
  • Year 4 - 1.04 x 56,243.20 = $58,492.93
  • Year 5 - 1.04 x 58,492.93 = $60,832.647, or $60,832.65 (rounded)

Therefore, the investment would be worth $60,832.65 at the end of the fifth year.

This is more easily calculated using the formula for Future Value:

Future Value = Present Value × (1 + interest rate)number of years

In this case FV= $50,000 × (1.04)5

FV= $60,832.65

(Refer to Section 1.1.3.2)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What document must a client be given prior to completing an application for an Individual Variable Insurance Contract (IVIC)?

A

Information Folder: The information folder contains all of the essential information for an informed purchasing decision. It must be given to the client before he completes an application and makes the decision to purchase an IVIC.

(Refer to Section 1.3.1.2, 6.3.2.1, 5.2.11.1)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is a segregated fund?

A

A segregated fund is a pool of funds held by an insurance company.

These funds are separate (i.e. segregated) from the other assets of the insurance company. The correct legal name for segregated funds is an Individual Variable Insurance Contract (IVIC).

(Refer to Section 1.3.1)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What are the six advantages of Segregated Funds?

A
  1. Maturity and death benefit guarantees
  2. Reset feature in some contracts
  3. Possible creditor protection
  4. Right to designate a beneficiary and bypass probate
  5. Tax benefit when capital losses are incurred
  6. Investor protection by Assuris

(Refer to Section 1.3.1.1)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

From the following list, determine the risk level of the funds, from the lowest to highest risk:

Equity funds
Bond funds
Dividend funds
Money market funds

A

Risk level, from the lowest to highest risk:

  1. Money market funds
  2. Bond funds
  3. Dividend funds
  4. Equity funds

(Refer to Section 2.2)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Jennice receives her final segregated fund contract from her agent, but decides to cancel the contract a day later. Can she cancel the contract and obtain a refund?

A

Yes.

An investor may cancel or rescind the segregated fund contract in writing within the specific time limitation set by the insurer providing the contract. Two days is the usual length of time permitted. The investor receives the lesser of the amount of premium paid or value of fund units on that date if it is a valuation date. If it is not a valuation date, then the value on the next valuation date applies.

(Refer to Section 2.1.15)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Alyssa invested $75,000 in an individual variable insurance contract that had a 75% maturity and death benefit guarantee. Six years into the contract, Alyssa exercised her reset option when the value of the contract was $84,000. Alyssa died in the 11th year of the contract. The fund was valued at $98,000 at the time of her death.

How much would her beneficiary receive from this contract?

A

$98,000: The reset option made the $84,000 subject to the death benefit and maturity guarantee. Since the fund value was $98,000, which is higher than the maturity and death benefit guarantees, the death benefit or maturity guarantee value did not need to come into play.

(Refer to Section 2.1.2)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

An investment in a segregated fund provides the investor with an assigned number of units. Why is it important for a segregated fund investor to know the value of the units when they are assigned?

A

It is essential for the investor to know the value of units when they are assigned if he wishes to follow performance and monitor changes in value. An increase may indicate that a reset is in order. A decrease could suggest a fund switch is in order.

(Refer to Section 2.1.4)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is a deferred annuity?

A

A deferred annuity is a contract that is purchased, generally with a lump sum amount of money, providing a guaranteed sum of money at a specified time in the future (i.e., yearly, monthly, quarterly or bi-annually).

(Refer to Section 3.4.2)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is the correct name for an individual who is receiving an income from an annuity contract?

A

The annuitant receives an income from an annuity contract.

(Refer to Section 1.3.2)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Can annuities be purchased as a registered product?

A

Yes, annuities can be registered or nonregistered. All income from a registered annuity is taxable; only the interest portion of payments from a non-registered annuity is taxable.

(Refer to Section 7.2.1.1)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

When does an immediate annuity provide its first payment?

A

The first payment of an immediate annuity is provided at the next payment date after the annuity is purchased based on the payment schedule selected. This may be the next month, three months, half year, or year.

(Refer to Section 3.4.1)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What type of organization can issue an annuity contract?

A

An insurance company can issue an annuity contract.

(Refer to Section 1.3.2.2)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Are deferred annuities protected under the Canada Deposit Insurance Corporation?

A

No, deferred annuities are protected under Assuris.

(Refer to Section 1.3.2.6)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Andrew wants to buy an Individual Variable Insurance Contract (IVIC). What type of licence must his advisor hold to sell an IVIC?

A

Andrew’s advisor must hold a life insurance licence to sell IVICs.

(Refer to Section 6.1)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Chester purchased an Individual variable insurance contract on December 18, 2007, in the amount of $250,000. This policy had a 10-year maturity guarantee and a 100% death benefit guarantee. Chester’s wife, Sophie, was the beneficiary under the contract. This policy had reset options that may be exercised once per year. Chester exercised this reset option on January 8, 2009, when the value of the individual variable insurance contract was $304,000. The value of the contract when Chester died on February 18, 2018, was $189,000.

What is the amount of money that Sophie would receive as the beneficiary under this contract?

A

Sophie would receive $304,000 as the beneficiary under the contract.

(Refer to Section 2.1.2)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Chester purchased an individual variable insurance contract on December 18, 2000, in the amount of $250,000. This policy had a 10-year maturity guarantee and a 100% death benefit guarantee. Chester’s wife, Sophie, was the beneficiary under the contract. This policy has reset options that may be exercised once per year. Chester exercised this reset option on January 8, 2002, when the value of the Individual Variable Insurance Contract was $304,000. The value of the contract when Chester died on February 18, 2011, was $289,000.

Chester had taken a personal loan of $85,000 from his local bank. Chester had no other assets. The bank is seeking to recoup the balance of the outstanding loan from Chester’s individual variable insurance contract.

How much money can the bank access from Chester’s Individual Variable Insurance Contract?

A

$0: Because Sophie is Chester’s spouse, the contract is creditor-proof.

Segregated funds provide this protection because they are insurance contracts and claims are not successful if the spouse, parent, children, or grandchildren are named as the beneficiary in the contract, if the beneficiary is irrevocable, or if the account is a registered account.

(Refer to Section 2.1.13)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is the minimum death benefit and maturity guarantee that must be included in all segregated fund contracts?

A

A segregated fund must have a minimum 75% guarantee at death or maturity.

(Refer to Section 2.1.1)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What is the purpose of an Individual Variable Insurance Contract’s (IVIC) information folder?

A

The information folder briefly and clearly discloses all material facts relating to the IVIC.

(Refer to Section 6.3.2.1)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Why is diversification important to an investor in segregated funds?

A

Diversification is key to an investor’s success. It lessens the risk for the average investor since risk is spread over all the investments held in the fund. It is very unlikely that all diversified assets in a segregated fund would lose value at the same time and to the same degree.

(Refer to Section 2.1.7)

22
Q

What is the major difference between the benefits of a segregated fund and a mutual fund?

A

Segregated funds offer death benefit guarantees and maturity guarantees whereas mutual funds do not offer these guarantees.

(Refer to Section 1.3.7.1)

23
Q

What is the difference between a term-certain annuity and a life annuity?

A

A life annuity makes income payments for the lifetime of the annuitant. A term certain annuity provides income for a specified period of time or to a specific age.

(Refer to Section 1.3.2.3)

24
Q

What factors determine annuity payments?

A

The factors that affect annuity payments are the annuity rate, interest rates, the age of the annuitant, the annuitant’s gender, the deposit amount, the payment schedule and the length of the payment period.

(Refer to section 3.5)

25
Q

What is a joint-and-last-survivor life annuity?

A

A joint-and-last-survivor life annuity is a life annuity that provides a guaranteed income during the course of two people’s lives.

On the death of one of the annuitants, the entire income is paid to the survivor for the remainder of his or her life. You can also purchase a joint-last-to-die life annuity that will reduce the amount paid on the first death (usually to a percentage of the original annuity payment).

(Refer to Section 3.2.3.2) (Refer to Section 3.2.2.2)

26
Q

What is a term annuity?

A

A term annuity provides an income that is guaranteed for a specified period of time (i.e., 5, 10, or 20 years). If the annuitant dies before the end of this guaranteed period, the balance of the benefits will be paid to the beneficiary until the guarantee period ends.

(Refer to Section 3.2.3.1)

27
Q

What is the difference between the annuitant and the beneficiary under a segregated fund contract?

A

An annuitant is the person who receives the annuity payments, whereas the beneficiary is the person who is destined to receive the proceeds of the contract when the annuitant dies.

(Refer to Section 6.2.1.2)

28
Q

Can a segregated fund have an irrevocable beneficiary?

A

A revocable beneficiary can be changed by the owner of the segregated fund contract in writing to the insurer or by filling out a change of beneficiary form. An irrevocable beneficiary must give their consent to be changed.

(Refer to Section 6.3.3.8)

29
Q

Why would an individual use the reset feature on a segregated fund?

A

The reset feature allows the investor in a segregated fund to lock in, at specified intervals (e.g., once a year), increases in the market value of the investment. If market value has declined at a reset date, then the reset feature is not utilized. Not all segregated funds offer reset.

(Refer to Section 5.2.6)

30
Q

What is the minimum maturity guarantee that must be provided under a segregated fund contract?

A

The return of at least 75% of deposits, 10 years after the date the contract is in force.

(Refer to section 2.1.1)

31
Q

What are two advantages of being able to name a beneficiary under a segregated fund contract, unlike other fund products?

A
  1. Bypassing probate saves probate fees – these can run into thousands of dollars.
  2. The beneficiary can receive the money much faster than they would if the contract had to go through probate.

(Refer to Section 2.1.11)

32
Q

What are the three types of sales charges that are available when purchasing a segregated fund?

A
  1. No load
  2. Front-end load
  3. Deferred sales charge

(Refer to Section 2.3.2)

33
Q

If a client purchased an individual variable insurance contract with a front-end load and subsequently withdraws/redeems all or part of the money from the contract, what impact would the front-end load have on the money withdrawn/redeemed?

A

There would not be any additional sale charges withheld from the money because the expense fees were paid when the contract was purchased.

(Refer to Section 2.3.2.1)

34
Q

If a client purchases an Individual Variable Insurance Contract with a deferred sales charge and subsequently withdraws/redeems all or part the money from the contract, what impact would the deferred sales charge have on the money withdrawn/redeemed?

A

There would be a sales charge withheld from the money withdrawn/redeemed during an agreed-upon number of years from the issue date of the contract.

The deferred sales charge is the most popular choice. The investor agrees to pay a sales charge if he or she redeems all or part of the original investment during an agreed-upon number of years. The sales charge declines over this period of time until, by about year six or seven, the charge is eliminated.

(Refer to Section 2.3.2.2)

35
Q

Is there an age restriction on purchasing an individual variable insurance contract?

A

There are age restrictions for both the last age to establish a contract and the last age at which a deposit can be made.

A segregated fund in a registered retirement savings plan (RRSP) is bound by the rules that apply to all RRSPs. Therefore, the oldest age at which a contract can begin as an RRSP is 71; deposits can be made until December 31 of the year in which the contract owner turns 71. Then, the RRSP is converted to a registered retirement income fund (RRIF).

An RRIF account sets the last age for authorized transfer, for instance from a roll-over of a spouse’s RRIF, at 90.

Segregated funds held in non-registered accounts and tax-free savings accounts (TFSAs) also set the maximum issue age limit at 90.

There are provincial variations between other types of registered accounts and age limits associated with each.

(Refer to Section 2.3.5)

36
Q

How are net capital gains and net capital losses under an individual variable insurance contract treated for income tax purposes?

A

A tax advantage for investments that may earn capital gains is capital losses. A capital loss is received by investors if the return on their investment is negative. Therefore, if an investor loses money on an investment, he incurs a capital loss.

Although a capital loss means an investor has lost money on his investment, half the capital loss can be deducted from taxable capital gains on other investments. The loss must be used first against capital gains in the year the loss is incurred.

However, if capital gains are unavailable or insufficient in that year, the capital loss may be applied against capital gains in any of the three previous years or in any future year. This reduces the amount of taxable capital gain and the tax to be paid on that gain.

(Refer to Section 1.2.5, 2.1.8)

37
Q

Elaine is 56 years old. She just received a $125,000 severance package from her long-time employer. Elaine knows that she wants to retire when she is 60 years of age. She will be eligible for a pension from her employer starting when she turns 60. She wants to purchase a condominium within the next six months. Elaine does not have any other investments.

Is an individual variable insurance contract a suitable investment product for Elaine at this time?

A

No, Elaine will require capital liquidity to purchase the condominium. Therefore, an individual variable insurance contract would not be a suitable investment choice. A segregated fund investment requires a minimum of 10-year term-to-maturity for the maturity guarantee to apply.

(Refer to Section 1.3.1.1)

38
Q

Tina has $120,000 in her RRSP today. She plans to retire in 15 years. Tina can earn a rate of 4.9% on the funds in her RRSP. How much will Tina have in her RRSP when she retires 15 years from today?

A

FV = PV × (1 + i)n
FV = 120,000 × (1.049)15
FV = 245,931

Tina will have $245,931 in her RRSP when she retires, provided that she continues to earn 4.9% per year.

(Refer to Section 1.1.3.2)

39
Q

When do RRSP plans mature?

A

On December 31, in the year that the plan holder turns 71 years old.

(Refer to Section 4.7.1.1)

40
Q

If a plan holder does not contribute his or her full allowable contribution limit to his or her RRSP in a particular year, what happens to the un-contributed limit?

A

Unused RRSP contribution room is carried forward and can be used in future years.

(Refer to Section 4.7.1.1)

41
Q

Each Canadian that has earned income and filed taxes in Canada will have an RRSP contribution limit. Canadians are allowed to over-contribute to their RRSPs by a cumulative maximum of $2,000 in their life. If plan holders contribute more than $2,000 above their limit, what is the amount of penalty applied?

A

A penalty tax of 1% per month is assessed on the cumulative excess amount (CEA) above $2,000 in the RRSP until the excess is withdrawn.

(Refer to Section 4.7.1.1)

42
Q

Brian is 73 years old and has a RRIF. Brian’s wife, Dana, is 48 years old and has an RRSP. Upon Brian’s death, he would like to leave the funds within his RRIF to his wife without any tax consequences. How can Brian do this?

A

Brian can name his wife Dana as the beneficiary on his RRIF. The funds within the RRIF will roll into Dana’s RRSP on a tax-deferred basis, meaning that Dana will only pay tax when the funds are withdrawn, at which time the withdrawals will be taxed as income.

(Refer to Section 4.7.2.2)

43
Q

Name the three employer-provided retirement pension plans.

A
  • Defined benefit pension plan (DBPP)
  • Defined contribution pension plan (DCPP)
  • Pooled registered pension plan (PRPP)

(Refer to Sections 4.5.1, 4.5.2, 4.5.3)

44
Q

What options does the holder of a defined benefit pension plan (DBPP) have upon retirement?

A

The funds can be used to purchase an annuity or the funds can be transferred into a locked-in plan.

(Refer to Section 8.2.2.1)

45
Q

What type of defined plan bears less risk to the employee?

A

The defined benefit pension plan (DBPP) is less risky for the employee. With a DBPP, the employee knows exactly how much he or she will pay for the pension as well as how much he or she will receive once he or she is retired.

(Refer to Section 4.5.1)

46
Q

What are the three ways of calculating the amount received by former employees of a defined benefit pension plan?

A
  • Career average earnings plans
  • Final average earnings plans
  • Flat benefit plans

(Refer to Section 4.5.1.3)

47
Q

Define the term “vesting.”

A

Vesting is the right of an employee to keep an employer’s contributions to a registered pension plan. Typically, this right exists after two years of participating in the pension plan.

(Refer to Section 4.5)

48
Q

Sometimes employees are eligible to make optional additional retroactive contributions to their pension plans for the years that they worked during which they did not contribute to a pension plan. What are these contributions called?

A

Past service pension adjustment (PSPA): Note that the PSPA also reduces the amount of RRSP contribution that a person can make in the same year the PSPA is made.

(Refer to Section 8.4.3)

49
Q

Provide another term for defined contribution plan.

A

Money purchase plan is another term for a defined contribution plan.

(Refer to Section 4.5.2)

50
Q

Why does an employee with a defined contribution plan bear more risk than an employee with a defined benefit plan?

A

An employee with a defined contribution plan knows the cost of the plan, however, he does not know how much he will receive as a pension. The pension amount will be determined by the investment performance of the employee and employer contributions.

(Refer to Section 4.5.2)

51
Q

How is the RRSP maximum contribution limit calculated?

A

The annual contribution limit for an RRSP is the lesser of:

18% of earned income for the previous year
Maximum dollar limit established for the year
(Refer to Sections 4.7.1.1)

SEGREGATED FUNDS & ANNUITIES (OFFICIAL LLQP) (20 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions