SEGREGATED FUNDS (Chapter 2) Flashcards
1
Q
Seg-fund Terminology
Segregated Fund
A
Investment pool structured as a deferred variable annuity and used by insurance companies to offer both capital appreciation and death benefits to policyholders.
2
Q
Seg-fund Terminology
Downside Protection
A
Limits investment risk by establishing a
minimum contract value payable at maturity.
3
Q
Seg-fund Terminology
Adjusted Cost Basis
A
A calculation that determines the tax cost of an investment to its investor
4
Q
Seg-fund Terminology
Management expense ratio (MER)
A
The combined costs of managing a fund including operating expenses and taxes.
5
Q
Seg-fund Terminology
Canadian Investment Funds Standards Committee (CIFSC)
A
Self-imposed mandate to standardize the classifications of Canadian-domiciled mutual funds.
6
Q
Seg-fund Terminology
Guaranteed Lifetime Withdrawal Benefit (GLWB)
A
Guarantees a minimum payout level
7
Q
Seg-fund Terminology
Guaranteed Minimum Withdrawal Benefit (GMWB)
A
Provides a regular income over a set period of time
8
Q
CHAPTER 2 - Segregated fund
Name at least three ADVANTAGES of segregated fund
A
- 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]
9
Q
Segregated funds provide two guarantees that protect the investor from the loss of principal, what are they?
A
- Maturity guarantee
- Death benefit guarantee.
10
Q
The minimum maturity date on segregated fund is________.
A
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
11
Q
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.
A
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.
12
Q
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.
A
TRUE
13
Q
On maturity of the seg fund contract, the policy owner has two options, what are they?
A
- Withdraw the value of his investment
- Extend the contract and leave his investment in place
14
Q
TRUE OR FALSE?
A partial withdrawal or full contract surrender before the maturity date receives the benefit of the maturity guarantee.
A
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]
15
Q
TRUE OR FALSE?
Segregated funds require medical underwriting.
A
- 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.
16
Q
The death benefit on seg-fund may be reduced by a sales charge.
A
TRUE
17
Q
Seg-fund Terminology
Reset
A
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.
18
Q
TRUE OR FALSE?
Both the policy owner, through the maturity guarantee, and beneficiary, through the death benefit guarantee, can benefit from “reset”.
A
TRUE
19
Q
TRUE OR FALSE?
Each deposit in a seg-fund has its own maturity guarantee (of 75% or 100% of deposit value)
A
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]
20
Q
TRUE OR FALSE?
An investment in a segregated fund provides the investor with an assigned number of units
A
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]
21
Q
Seg-fund Terminology
Net asset value per unit (NAV) / (NAVPU)
A
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.
22
Q
TRUE OR FALSE?
Investment growth in a fund is generated in the form of interest, dividends and capital gains.
A
TRUE
23
Q
FILL IN THE BLANK!
Interest income is taxed at ______ % while capital gains are only taxed at _____ %.
A
Interest income is taxed at 100% while capital gains are only taxed at 50%.
24
Q
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.
A
TRUE
25
*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]
26
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)
27
*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*.
28
*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
29
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
30
*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]
31
*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]
32
A withdrawal in seg-fund is also known as...
Redemption
33
*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]
34
*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]
35
*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]
36
*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]
37
*TRUE OR FALSE?*
There is no medical underwriting of an application for a segregated fund contract
TRUE
38
The right to cancel a contract is known as_________.
The right of rescission.
39
*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]
40
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.
41
*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]
42
*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
43
# *Seg-fund Terminology*
Money market funds
Intended to offer investors high liquidity, low-risk funds with a low rate of return.
44
# *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.
45
*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]
46
# *Seg-fund Terminology*
High-yield bonds
Also known as *junk bonds* and such funds carry much higher risk than traditional bond funds.
47
# *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
48
# *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
49
*TRUE OR FALSE?*
Royal Bank of Canada is a large-cap company
TRUE
50
# *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
51
# *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**
52
*TRUE OR FALSE?*
A balanced growth fund emphasizes stocks. A balanced income fund emphasizes bonds
TRUE
53
# *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.
54
# *Seg-fund Terminology*
Dividend funds
Invests in companies that have a history of paying dividends
55
# *Seg-fund Terminology*
Dividends
A distribution of a percentage of company profits by the Board of Directors to company shareholders.
56
# *Seg-fund Terminology*
Mortgage Fund
Unit trust operated by a fund manager which invests in mortgages on properties
57
# *Seg-fund Terminology*
Real estate equity funds
Funds that must invest at least 90% of their assets in **retail, commercial, industrial and residential properties**
58
# *Seg-fund Terminology*
Real Estate Investment Trusts (REITs)
Companies that invest in real estate
59
# *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
60
# *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
61
# *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
62
# *Seg-fund Terminology*
Industry-specific funds
Mutual funds which **invest in a particular sector or industry** are said to be sector-specific funds.
63
*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
64
What are the *limitations* of segregated funds?
- Risk to capital;
- Sales charge;
- Management expense;
- Penalties;
- Age restrictions for acquisition.
65
*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]
66
# *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.
67
# *Seg-fund Terminology*
Deferred sales charge (DSC)
A percentage applied against the amount withdrawn from a segregated fund during a set period of time.
68
Segregated funds that do not have a sales charge are called....
no-load funds
69
*TRUE OR FALSE?*
The MER of segregated funds is typically HIGHER than the MER for an equivalent mutual fund.
TRUE
70
*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]
71
# *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.
72
*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]
73
*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
74
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.)*
75
*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]
76
Investment income can be earned in both non-registered and registered accounts **as**...
- Interest;
- Dividends;
- Capital gains or losses;
- Foreign income
77
*TRUE OR FALSE?*
Capital gains and Canadian dividends receive preferential tax treatment
TRUE
78
*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*
79
*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*
80
*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]
81
*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.*
82
*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
83
*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.*
84
*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
85
*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
