SEGREGATED FUNDS (Chapter 2) Flashcards
Seg-fund Terminology
Segregated Fund
Investment pool structured as a deferred variable annuity and used by insurance companies to offer both capital appreciation and death benefits to policyholders.
Seg-fund Terminology
Downside Protection
Limits investment risk by establishing a
minimum contract value payable at maturity.
Seg-fund Terminology
Adjusted Cost Basis
A calculation that determines the tax cost of an investment to its investor
Seg-fund Terminology
Management expense ratio (MER)
The combined costs of managing a fund including operating expenses and taxes.
Seg-fund Terminology
Canadian Investment Funds Standards Committee (CIFSC)
Self-imposed mandate to standardize the classifications of Canadian-domiciled mutual funds.
Seg-fund Terminology
Guaranteed Lifetime Withdrawal Benefit (GLWB)
Guarantees a minimum payout level
Seg-fund Terminology
Guaranteed Minimum Withdrawal Benefit (GMWB)
Provides a regular income over a set period of time
CHAPTER 2 - Segregated fund
Name at least three ADVANTAGES of segregated fund
- Guarantees;
- Growth secured by reset;
- Funding flexibility through ongoing deposits;
- Ease of monitoring value;
- Guaranteed income;
- Professional management;
- Diversification;
- Tax benefits;
- Switches between funds;
- Ability to withdraw (redemption);
- Exemption from probate fees;
- Investor protection;
- Protection from creditors;
- Absence of medical underwriting;
- Right of rescission.
[Ref. 2.1]
Segregated funds provide two guarantees that protect the investor from the loss of principal, what are they?
- Maturity guarantee
- Death benefit guarantee.
The minimum maturity date on segregated fund is________.
The minimum maturity date on segregated fund is ten years never less, from the time the first deposit (or premium) is paid to the insurer.
Some contracts offer maturity dates much longer than ten years
FILL IN THE BLANK!
The maturity guarantee ensures that, on the maturity date, an amount that is equal to at least _____ of the amount the policy owner deposited to the contract is paid out.
The maturity guarantee ensures that, on the maturity date, an amount that is equal to at least 75% of the amount the policy owner deposited to the contract is paid out.
TRUE OR FALSE?
If the policy owner buys the segregated fund contract in an RRSP or a RRIF, the policy owner must be the annuitant of the policy.
TRUE
On maturity of the seg fund contract, the policy owner has two options, what are they?
- Withdraw the value of his investment
- Extend the contract and leave his investment in place
TRUE OR FALSE?
A partial withdrawal or full contract surrender before the maturity date receives the benefit of the maturity guarantee.
FALSE
A partial withdrawal or full contract surrender before the maturity date does not receive the benefit of the maturity guarantee
[Ref. 2.1.1.1]
TRUE OR FALSE?
Segregated funds require medical underwriting.
- Segregated funds do not require medical underwriting.
- Therefore, an older person or a person in ill health does not need to be concerned about poor market conditions at the time of his death. The guarantee gives him peace of mind that his beneficiary will receive at least 75% of deposits.
The death benefit on seg-fund may be reduced by a sales charge.
TRUE
Seg-fund Terminology
Reset
When the value of the contract rises due to fund performance and it achieves a new high, the investor can set the contract value at that higher level.
- The new maturity date of the contract is ten years from the reset date.
TRUE OR FALSE?
Both the policy owner, through the maturity guarantee, and beneficiary, through the death benefit guarantee, can benefit from “reset”.
TRUE
TRUE OR FALSE?
Each deposit in a seg-fund has its own maturity guarantee (of 75% or 100% of deposit value)
TRUE
- Deposit one has a maturity guarantee that
applies from its deposit date, deposit two has a maturity guarantee from its deposit date, deposit three has a maturity guarantee from its deposit date, and so on.
[Ref. 2.1.3]
TRUE OR FALSE?
An investment in a segregated fund provides the investor with an assigned number of units
TRUE
- (Example) An investor invests $1,000 in ZYX fund, in which units have a market value of $10; he is assigned 100 units ($1,000 ÷ $10). If the market value of the units increases to $12, his investment will be valued at $1,200 ($12 × 100).*
[Ref. 2.1.4]
Seg-fund Terminology
Net asset value per unit (NAV) / (NAVPU)
Net Asset Value is the net value of an investment fund’s assets minus its liabilities, divided by the number of shares or units outstanding.
TRUE OR FALSE?
Investment growth in a fund is generated in the form of interest, dividends and capital gains.
TRUE
FILL IN THE BLANK!
Interest income is taxed at ______ % while capital gains are only taxed at _____ %.
Interest income is taxed at 100% while capital gains are only taxed at 50%.
TRUE OR FALSE?
Interest, dividends, and capital gains increase the ACB.
Capital losses decrease the ACB.
The change to the ACB is tracked by the insurance company.
TRUE
TRUE OR FALSE?
If an investor wants cash from the fund, he must make a withdrawal by redeeming the fund’s ACB.
FALSE
If an investor wants cash from the fund, he must make a withdrawal by redeeming fund units.
[Ref. 2.1.4]
A segregated fund contract typically returns its value on maturity in a lump-sum payment or guaranteed stream of payment. Such a contract is available in two forms, what are they?
- Guaranteed Minimum Withdrawal Benefit (GMWB)
- Guaranteed Lifetime Withdrawal Benefit (GLWB)
TRUE OR FALSE?
The interest, dividends and capital gains earned in a fund are reinvested in that fund.
TRUE
- They increase unit value and increase the investor’s adjusted cost base (ACB) per unit.
TRUE OR FALSE?
The investor who wants to switch his account value from one fund to another may do so with a segregated fund investment.
TRUE
There are two information documents provided by the agent when the client wants to make a seg-fund account switch, what are those documents?
- Information folder
- Fund Facts for the new fund
TRUE OR FALSE?
There are no tax implications when an investor makes an account switch between fund accounts.
FALSE
An investor may incur a tax liability when a switch is made.
[Ref. 2.1.9]
TRUE OR FALSE?
An investor who switches funds where each fund charges the same load, (e.g. a front-end load (FEL)), will not incur a fee for the switch
TRUE
- However, there may be a fee for switching between funds with dissimilar loads, (e.g. a no-load fund to an FEL).
[Ref. 2.1.9]
A withdrawal in seg-fund is also known as…
Redemption
TRUE OR FALSE?
Probate fees are a charge by the province or territory (including Québec & Manitoba) against the value of a deceased’s estate.
FALSE
Probate fees are a charge by the province or territory against the value of a deceased’s estate. Only Québec and Manitoba do not charge probate fees
[Ref. 2.1.9]
TRUE OR FALSE?
Probate fees must be paid by the estate of the deceased after the property has been inherited.
FALSE
Probate fees must be paid by the estate of the deceased before any property can be inherited as specified in the will.
[Ref. 2.1.9]
TRUE OR FALSE?
Probate fees are not charged to trusts
or when a surviving spouse inherits assets.
TRUE
- Probate fees also do not apply when the beneficiary of a segregated fund contract is not the estate. A named beneficiary receives the proceeds from the contract probate-free. This includes the spouse, parents, children and grandchildren of the contract owner or annuitant.
[Ref. 2.1.9]
TRUE OR FALSE?
Assuris guarantees a segregated fund contract owner will retain up to $50,000 or 75% of guarantees.
FALSE
Assuris guarantees a segregated fund contract owner will retain up to $60,000 or 85% of guarantees, whichever is higher
For investments valued at more than $60,000, contract owners will retain 85% of guarantees.
[Ref. 2.1.12.1]
TRUE OR FALSE?
There is no medical underwriting of an application for a segregated fund contract
TRUE
The right to cancel a contract is known as_________.
The right of rescission.
FILL IN THE BLANK!
An investor may cancel or rescind the segregated fund contract in writing within the specific time limitation set by the insurer providing the contract. _____________ is the usual length of time permitted.
a) 15 days
b) 7 days
c) 5 days
d) 2 days
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.
There are no rescission rights with mutual funds or ETFs
[Ref. 2.1.15]
The Canadian Investment Funds Standards Committee (CIFSC) classifies all fund investments into categories by
asset class. What are the 5 asset classes?
- Cash;
- Fixed income;
- Equity;
- Commodity;
- Other.
TRUE OR FALSE?
if an investor has a low tolerance for risk, then he will be suited for a fund classed as an equity fund.
FALSE
If an investor has a low tolerance for risk, then he will not be suited for a fund classed as an equity fund.
His better choice will be a lower-risk fund, such as a bond fund invested in government bonds.
[Ref. 2.2]
TRUE OR FALSE?
Money market funds must invest at least 95% of their total net assets in cash or cash equivalents, such as Government of Canada short-term bonds or Treasury bills
TRUE
Seg-fund Terminology
Money market funds
Intended to offer investors high liquidity, low-risk funds with a low rate of return.
Seg-fund Terminology
Bond Fund
- A pooled investment vehicle that invests primarily in bonds (government, municipal, corporate, convertible) and other debt instruments with fixed-income.
TRUE OR FALSE?
Fixed-income funds are generally medium-risk and have a medium rate of return
FALSE
Fixed-income funds are generally low-risk and have a low rate of return.
[Ref. 2.2.2]
Seg-fund Terminology
High-yield bonds
Also known as junk bonds and such funds carry much higher risk than traditional bond funds.
Seg-fund Terminology
Equity funds
- Also known as growth funds and stock funds
- They invest in stocks of publicly traded companies and income trusts to generate dividend income and capital gains
- An equity fund may be diversified across different types of businesses or concentrated in a particular sector, such as financial services
- Susceptible to industry risk
Seg-fund Terminology
Market capitalization (cap)
- A category of equity funds that give an investor the opportunity of fine-tuning their risk level to company size.
- The cap is a range that shows how large a company is
TRUE OR FALSE?
Royal Bank of Canada is a large-cap company
TRUE
Seg-fund Terminology
Income Fund
- Funds that pursue capital appreciation by investing in stocks that pay dividends, bonds and other income generating securities.
- Susceptible low-risk
Seg-fund Terminology
Balanced Fund
- Balance between stocks (and the growth potential they represent) and fixed income (and the safety the category represents)
- Also known as balanced growth or balanced income funds
TRUE OR FALSE?
A balanced growth fund emphasizes stocks. A balanced income fund emphasizes bonds
TRUE
Seg-fund Terminology
Target date funds
- Combines equity and fixed-income investments. Its objective is to decrease risk over time.
- Structured to maximize the investor’s returns by a specific date.
- They take more investment risks when you’re young and gradually get more conservative as you near retirement.
Seg-fund Terminology
Dividend funds
Invests in companies that have a history of paying dividends
Seg-fund Terminology
Dividends
A distribution of a percentage of company profits by the Board of Directors to company shareholders.
Seg-fund Terminology
Mortgage Fund
Unit trust operated by a fund manager which invests in mortgages on properties
Seg-fund Terminology
Real estate equity funds
Funds that must invest at least 90% of their assets in retail, commercial, industrial and residential properties
Seg-fund Terminology
Real Estate Investment Trusts (REITs)
Companies that invest in real estate
Seg-fund Terminology
Index funds
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
Seg-fund Terminology
Fund of funds
- a fund that invests in other funds
- Purpose of this approach is to benefit from managerial expertise in other funds and to diversify
Seg-fund Terminology
Specialty funds
- Also known as Socially responsible funds
- A mutual fund or other fund that invests predominantly or exclusively in a single industry, sector, or region of the world.
- Appeals to specific investor wants and respond to investor needs
- Provide an alternative for investors who for religious, political, environmental or moral reasons find the holdings of standard funds unacceptable for investment
Seg-fund Terminology
Industry-specific funds
Mutual funds which invest in a particular sector or industry are said to be sector-specific funds.
TRUE OR FALSE?
The life insurance agent’s role is to be aware of his clients’ needs to ensure funds, whether new or old, align with client needs, interests and objectives.
TRUE
What are the limitations of segregated funds?
- Risk to capital;
- Sales charge;
- Management expense;
- Penalties;
- Age restrictions for acquisition.
TRUE OR FALSE?
If the investor needs to make a withdrawal before the contract matures, he receives the benefit of the maturity guarantee minus any outstanding fees and charges.
FALSE
If the investor needs to make a withdrawal before the contract matures, he does not receive the benefit of the maturity guarantee. He receives market value for the withdrawal minus any outstanding fees and charges.
[Ref. 2.3.1]
Seg-fund Terminology
Front-end sales charge
A fee charged at the beginning of the contract, known as its front end that reduces the investor deposit.
Seg-fund Terminology
Deferred sales charge (DSC)
A percentage applied against the amount withdrawn from a segregated fund during a set period of time.
Segregated funds that do not have a sales charge are called….
no-load funds
TRUE OR FALSE?
The MER of segregated funds is typically HIGHER than the MER for an equivalent mutual fund.
TRUE
TRUE OR FALSE?
Higher MERs are associated with funds requiring less active management and decision making. Low MERs are charged by funds such as index funds that require more active management
FALSE
Higher MERs are associated with funds requiring more active management and decision making. Low MERs are charged by funds such as index funds that require less active management
[Ref. 2.3.1]
Seg-fund Terminology
Trailing commission
A sales compensation fee incorporated in the MER that pays the agent on a continuing basis for the advice he has provided for as long as the investor holds the fund.
TRUE OR FALSE?
The oldest age at which a contract can begin as an RRSP is 65; deposits can be made until December 31 of the year in which the contract owner turns 65.
FALSE
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)
[Ref. 2.3.5]
TRUE OR FALSE?
Segregated funds held in non-registered accounts and tax-free savings accounts (TFSAs) also set the maximum issue age limit at 90
TRUE
Taxation of a segregated fund is based on two fundamentals what are they?
Whether the account is taxable, (e.g. a non-registered account) or registered, (such as an RRSP/RRIF/RDSP/LIRA,) or non-taxable, (e.g. a TFSA.)
TRUE OR FALSE?
Deposits or premiums paid into a non-registered account or a TFSA for a segregated fund purchase are tax-deductible.
FALSE
Deposits or premiums paid into a non-registered account or a TFSA for a segregated fund purchase are not tax-deductible.
However, they are tax-deductible when paid into a registered account, except when the account is a registered education savings plan (RESP) or registered disability savings plan (RDSP).
[Ref.2.4.2]
Investment income can be earned in both non-registered and registered accounts as…
- Interest;
- Dividends;
- Capital gains or losses;
- Foreign income
TRUE OR FALSE?
Capital gains and Canadian dividends receive preferential tax treatment
TRUE
TRUE OR FALSE?
When units of a non-registered account are redeemed for the purpose of a withdrawal, a capital gain or loss will be incurred.
TRUE
- This must be reported on the investor’s annual tax return
TRUE OR FALSE?
When a withdrawal is made from an RRSP or a RRIF, the institution holding the account retains a portion of the withdrawal as an advance against future tax owing.
TRUE
- Even though the investor does not receive 100% of his withdrawal due to the withholding tax, the
full amount of the withdrawal must be declared for tax purposes
TRUE OR FALSE?
RRIFs accounts don’t require a minimum annual withdrawal
FALSE
RRIF accounts require a minimum annual withdrawal
The annual minimum RRIF withdrawal should not be charged the withholding tax.
Withdrawals in excess of the minimum are subject to withholding tax
[Ref. 2.4.3]
TRUE OR FALSE?
When the segregated fund is held in a non-registered account, any amount paid as a maturity guarantee or death benefit guarantee top-up is taxable as a capital gain.
TRUE
- Also, when the fund is in a registered account, top-ups are taxable as income.
TRUE OR FALSE?
A surviving spouse named as the beneficiary of a registered account can defer tax on the top-up if he rolls the proceeds into his RRSP or RIFF
TRUE
TRUE OR FALSE?
Allocations are one way an investor benefits financially from his segregated fund.
TRUE
Investment growth is generated in the form of interest, dividends and capital gains which are reinvested in the fund, increasing the unit value and the investor’s adjusted cost base (ACB) per unit.
TRUE OR FALSE?
The ACB is a calculation that determines the tax cost of an investment to its investor.
Increasing the ACB reduces tax when the units are sold.
TRUE
TRUE OR FALSE?
For tax purposes, capital gains and losses earned are reported as such.
Capital losses are used to reduce capital gains. They can be used in the year they are received or in the previous three years.
They can also be carried forward indefinitely.
TRUE
