Segregrated Funds & Annuities Flashcards
Ariel is a 30 year old highschool music teacher who has investments in a 5-year GIC, a high interest savings account, and a money market segregated fund, Ariel’s major investment risk is:
a. Interest rate risk
b. Inflation risk
c. Credit risk
d. Market risk
Inflation risk
Rationale : her investments are all currently low risk. Because the GIC is guaranteed there is no risk there. The high interest savings account has low risk, but does carry the risk of falling interest rates. Because these are guaranteed investments with low rates of return, the risk is tied to inflation. If inflation exceeds the rate of return the investment can lose money
1.4.2 inflation risk
For the past 23 years Jennifer has worked for a company with a DBPP. The formula to calculate the pension benefit is 2% per year of the employee’s last five years of income. In Jennifer’s situation, that average income is $98,500. How much pension income can Jennifer expect to receive annually?
a. $45,080
b. $45,310
c. $9,850
d. $98,500
b. 45,310
Rationale : Formula is 2% of your average salary in the past 5 years x the number of years as a plan member:
Pension = 2% x $98,500 x 23
Pension = 1,970 x 23
Pension = $45,310
Pauline works for a company that has a DBPP, but is concerned about what might happen if the company goes out of business or is unable to fund the pension. Which of the following statements is most correct?
A. Pension payments are not guaranteed
B. Only DCPP have payment guarantees
C. It may be government guaranteed
D. DBPP are fully guaranteed by the government
C) It may be government guaranteed
As per section 1.3.11.4 Returns and guarantees of group plans, The only group pension plan that offers a guaranteed income on retirement is a DBPP. However, DBPPs can only guarantee the expected retirement income to members if their plans are fully funded.
Some employers have pension shortfalls. This means their liabilities are greater than their ability to pay. Pensioners could receive less than the promised amount of pension.
Some jurisdictions provide a guaranteed minimum income to pensioners who experience shortfalls due to underfunding. For example, in Ontario, the Pension Benefits Guarantee Fund insures pensions up to $1,000/month.
All of the following are characteristics of segregated income funds except:
A) often includes government and corporate bonds
B) typically includes large cap dividend income shares and preferred shares
C) mainly focuses on growth
D) fairly low risk and stable
A) often includes government and corporate bonds is correct as per 2.2.4 income funds/
“Typically includes large cap dividend income shares and preferred shares” is also correct, as these are lower risk investments
“Fairly low risk and stable” is correct also
Out of the following list who might feel there were disadvantages to investing in segregated funds?
A) a person saving for a home down payment in 3 years
B) a person with health issues wanting to maximize his estate
C) an individual wanting to reduce estate costs
D) an individual who owns a business
A) a person saving for a home down payment in 3 years
Rationale: a person saving for a home down payment in 3 years might view this as a disadvantage as per 1.3.1.1; minimum 10-year-term to maturity for the maturity guarantee to apply
Janet has $65,000 to deposit and has a choice between her bank’s 5-year GIC and her insurance company’s deferred annuity for the same time period. She chooses the insurance company’s deferred annuity because:
A) GICs are taxed annually whereas deferred annuities are not
B) As an insurance product it is not taxed until maturity
C) An annuity can be creditor protected bypass probate
D) It provides greater consumer security if insurance company becomes insolvent
C) an annuity can be creditor protected and bypass probate
Rationale : An annuity can be creditor protected and bypass probate is correct as per section 3.1.3 Creditor protection, and 3.1.4 Estate planning benefits
An employer wishes to start a group pension plan. After speaking with her life insurance agent she has also began to think about a group registered retirement plan. Which of the following statements is NOT accurate about a GRRSP?
A) this will provide the benefit of being a payroll savings plan
B) there are usually more investment options in a group plan
C) plan members may have access to the Home Buyer’s Plan (HBP)
D) Plan members may have access to the Lifelong Learning Plan
B) There are usually more investment options in a group plan
Rational: As per section 4.6.2 Group registered retirement savings plan (GRRSP), A GRRSP is identical to an individual registered retirement savings plan (RRSP), except offered on a group basis. Doing so enables members to pay lower fees on their group plan than they would pay on an individual plan. However, there may be fewer investment choices in a GRRSP.
A GRRSP also offers the benefit of being a payroll savings plan in which a member can enjoy the long-term advantages of regular savings.
Because the plan is an RRSP, RRSP features such as the Home Buyers’ Plan (HBP) or Lifelong Learning Plan (LLP) may be available to plan members with a GRRSP.
Your client, Dan, has asked you for some advice. He would like to know how much he can contribute to his RRSP in the current year without over contributing. Dan has a carry forward amount of $31,500 and a pension adjustment of $3,280 from the previous year. In addition Dan has been divorced for the past three years and pays $2,500 per month in alimony.
Given this scenario and based on the financial information below, how much can dan contribute this year
Current year base salary: $8,5000, Previous year $80
If a life insurance agent has no previous relationship with a client, and that client is a politically exposed foreign person investing in a non-registered account, the agent is required to submit an identification document, issued by the provincial or federal government. Out of the following list what is NOT an acceptable identification document?
A) passport
B) birth certificate
C) drivers licence
D) drivers insurance
D) Driver’s insurance
Matilda has been with her current employer for 16 years. That employer has a generous contributory DBPP that your client has taken advantage of. She has been recruited to a competitors firm and wants to know what her options are. Which of the following is NOT an option for your client?
A) transfer the commuted value DBPP to a LIRA
B) transfer the pension money to her RRSP
C) Transfer the pension monies to her new employer’s pension plan
D) leave the pension moneys with her current employer
B) Transfer the pension money to her RRSP
Rationale : A DBPP is locked in and must be transferred to another locked in account, such as a LIRA. An RRSP is not locked in because withdrawals can be made at any time.
Paul had a term annuity to age 90, and had named his three children as equal beneficiaries of the contract. Paul received monthly income from his annuity until he turned 86, when he died. At that time his children filed a death claim for Paul’s annuity. Which of the following statements is most correct
A) each were responsible for the tax on the sum they received
B) Each received the benefit payments tax free
C) each were responsible for tax, but only if they received a lump sum
D) Each were responsible for tax, but only if they received monthly income
A) each were responsible for the tax on the sum they received
Rationale: this question is taken directly from the example in 7.4.2.1
A married couple who classify themselves as very conservative investors have already contributed the maximums to their RRSPs and TFSAS and would like to invest more in other products. They would like to know which or the following options best fits their investing profile
a. Corporate bond mutual fund
B. Blue chip stocks
C) equity segregated fund that has a 100% death and maturity guarantee
d. Diversified Canadian equity mutual fund
C)
C is correct because since they have a conservative risk profile the death and maturity guarantees best suit their needs
Joe is retiring from his position with the manufacturing company that he’s been with for over the past 35 years. As part of his retirement benefits he has been given a lump sum if cash equal to the last five years of his salary. Since he is retiring early at age 60, he wants to know what the best option is to use this money to provide consistent income over the next five years, until his retirement pension begins. Which of the following choices should you suggest?
A) 5-year immediate term annuity
B) 5-year guaranteed term annuity
C) 5-yeqr variable income term annuity
D) 5-year deferred term annuity
A) 5-year immediate term annuity
Joe needs a steady income stream for the next 5 years. The 5 year term annuity will provide an income stream that will start immediately so that he will be able to live comfortably until his retirement pension starts.
Kevin has investments in a non-registered account. Since he understands that these investments are taxable, he is looking for the most tax-efficient option for them. Given this scenario which of the following segregated funds will be of most interest to him?
A) Canadian Dividend Fund
B) Canadian Bond Fund
C) Balanced Fund
D) U.S Equity Fund
A) Canadian Dividend Fund
Rationale : Dividends from Canadian corporations are taxed at a lower rate than interest income and foreign dividends. As such, the Canadian Dividend Fund is the most tax-efficient fund among the listed options.
On November 6, 2016 Jenny purchased a $200,000 non-registered segregated fund that invests in Canadian equities. The segregated fund has a 10 year, 75% maturity guarantee. If this fund matures on November 6, 2026 with an account value of $160,000, how much will Jenny receive from the maturity guarantee?
A) $150,000
B) $160,000
C) $0
D) $200,000
C) $0
Rationale: The question is asking for the value of the guarantee at maturity. Since the fund account value exceeds the guarantee there is no value to the guarantee. 2.1.1.1 Maturity Guarantee, if the market value is greater than the guarantee value, the policy owner receives the market value.
