SEGREGATED FUNDS ANNUITIES EXAMS SCRIPT
ANSWERS AND QUESTIONS SET A+
✔✔Samantha invested $1,000,000 into a segregated fund and named her daughter
Lisa as beneficiary.
- The fund offered a 100% guarantee upon death or upon the 10 year maturity date.
- One year into the contract, Samantha died when the current market value was only
$950,000.
What would happen?
LLQP - SFA VL 07 - ✔✔Despite the market value being only $950,000, Lisa would
receive the guaranteed amount of $1,000,000.
The funds would not attract probate fees because they transfer directly to her outside of
the will.
Note:
Naming a beneficiary allows you to avoid probate fees, but not income taxes
✔✔Creditor proofing
LLQP - SFA VL 08 - ✔✔Segregated Fund contract is an insurance contract therefore
provides the opportunity for creditor proofing.
It is too extreme to make claim against the life insurance policy that individual put in
place to take care of their love ones upon death.
✔✔Give three products that allows you to name a beneficiary and are potentially
protected from creditors when criteria are met.
LLQP - SFA VL 08 - ✔✔- Life insurance
- RRSP Accounts
- Segregated Funds
,✔✔In order the the segregated funds to be creditor proof, what are three criteria
LLQP - SFA VL 08 - ✔✔1. The segregated fund investment must have been made in a
good faith.
The investor cannot invest purely to avoid creditors.
2. There must be a named beneficiary.
3. The right type of beneficiary must be named
✔✔In order the the segregated funds to be creditor proof, the segregated fund
investment must have been made in a good faith.
Give an example
LLQP - SFA VL 08 - ✔✔Charlie is headed towards bankruptcy. To avoid creditors, he
invested $100,000 into a segregated fund six months prior to declaring bankruptcy.
His creditors could argue it was not made in a good faith. When e made this investment,
he was already experiencing financial difficulty.
Note:
This requirement does not an individual from investing a segregated fund in good times.
In case, down the road they experience financial difficulty.
What it prevents is making an investment while they are having financial difficulty purely
to avoid creditors.
✔✔Bonnie has invested $10,000 into a Segregated Fund with the deposit having been
made in good faith several years ago but she is now facing financial diverticulitis.
Bonnie is planning on making his friend as revocable beneficiary on his Segregated
Fund Contract. The moment his bankruptcy is discharged, he is going to change the
beneficiary back to himself.
Clearly, Bonnie is naming Clyde temporarily as beneficiary in an attempt to avoid
creditors.
Will this work? What rules in place to prevent it?
LLQP - SFA VL 08 - ✔✔Once you've named someone an irrevocable beneficiary, you
cannot change the beneficiary without permission! So, Bonnie has to think twice about
naming Clyde as irrevocable beneficiary.
,✔✔Creditor proofing is designed to protect the contract holder (the investor) and can be
waived.
Why would a contract holder want to waive creditor proofing?
LLQP - SFA VL 08 - ✔✔For example,
To save his business, Lloyd applied for a $10,000 bank loan. The bank was willing to
give him the load but they needed collateral.
In order to provide his Segregated Fund as collateral for that loan, he need to waive
creditor proofing by signing a Collateral Assignment
✔✔Collateral Assignment
LLQP - SFA VL 08 - ✔✔
✔✔Why are they called "Segregated Funds"?
LLQP - SFA VL 09 - ✔✔The assets of a Segregated Fund are kept separate
(segregated) from the assets of the insurance company.
✔✔What would happen if the Segregated Fund issuer were to go bankrupt?'
LLQP - SFA VL 09 - ✔✔The assets of the fund would be available for the unit holders
because they were kept separate (segregated) from the assets of the insurance
company.
But, the insurance company would no longer be around to honour the guarantees.
Example:
Dudley invested $25,000 into a Segregated Fund that offered a 100% guarantee upon
death or upon the 10 year maturity mark.
Upon his death, the contract had a market value of only $20,000 and the insurance
company filed for bankruptcy.
What would happen now?
The assets of a Segregated Fund would have been kept separate, or segregated, from
the assets of the insurance company. So, the $20,000 market value of the investment
would still be available for the unit holder.
However, the insurance company is no longer honor the shortfall and the guarantees.-
>Assure can address this risk
, ✔✔Assuris
LLQP - SFA VL 09 - ✔✔A protection fund will step into the shoes of the insurance
company and honour the guarantee.
The Coverage for Segregated Funds is the GREATER of:
- 100% of the promised amount(the guarantee) up to $60,000; or
- 85% of the promised amount (the guarantee)
✔✔Segregated Funds are also known as?
LLQP - SFA VL 09 - ✔✔- Seg Funds
- Individual Variable Insurance Contracts (IVICs):
Segregated fund is a contract with insurance Company and the value of that contract
will vary based on how the investments perform
✔✔If there a medical underwriting when buying a segregated fun?
LLQP - SFA VL 09 - ✔✔With the segregated fund, all the insurance company is doing is
guaranteeing what you had in the first place.
For example:
Peter invested $10,000 into Segregated Fund that guaranteed 75% upon death or upon
the 10 year maturity mark.
- Even though there is a death benefit guarantee that could translate into a death
benefit, they do not do medical underwriting because all the insurer is doing is
guaranteeing all or a portion of what he has in the first place.
- It is not like Life Insurance where you pay a small monthly premium and upon death, it
translates into a large death benefit. In that case, the insurance company would have a
concern for your health.
✔✔LLQP - SFA VL 09 - ✔✔The segregated fund is a contact with insurance company
so
- you must be of legal age to enter into a contract!
-
An insurance company would be comfortable selling a Segregated Fund to a 30 year
old with a 100% guarantee upon death because they know:
- It's unlikely a 30 year old is going to die in 10 years, and
- A good performing equity fund should have a positive return over a long enough time
span.
ANSWERS AND QUESTIONS SET A+
✔✔Samantha invested $1,000,000 into a segregated fund and named her daughter
Lisa as beneficiary.
- The fund offered a 100% guarantee upon death or upon the 10 year maturity date.
- One year into the contract, Samantha died when the current market value was only
$950,000.
What would happen?
LLQP - SFA VL 07 - ✔✔Despite the market value being only $950,000, Lisa would
receive the guaranteed amount of $1,000,000.
The funds would not attract probate fees because they transfer directly to her outside of
the will.
Note:
Naming a beneficiary allows you to avoid probate fees, but not income taxes
✔✔Creditor proofing
LLQP - SFA VL 08 - ✔✔Segregated Fund contract is an insurance contract therefore
provides the opportunity for creditor proofing.
It is too extreme to make claim against the life insurance policy that individual put in
place to take care of their love ones upon death.
✔✔Give three products that allows you to name a beneficiary and are potentially
protected from creditors when criteria are met.
LLQP - SFA VL 08 - ✔✔- Life insurance
- RRSP Accounts
- Segregated Funds
,✔✔In order the the segregated funds to be creditor proof, what are three criteria
LLQP - SFA VL 08 - ✔✔1. The segregated fund investment must have been made in a
good faith.
The investor cannot invest purely to avoid creditors.
2. There must be a named beneficiary.
3. The right type of beneficiary must be named
✔✔In order the the segregated funds to be creditor proof, the segregated fund
investment must have been made in a good faith.
Give an example
LLQP - SFA VL 08 - ✔✔Charlie is headed towards bankruptcy. To avoid creditors, he
invested $100,000 into a segregated fund six months prior to declaring bankruptcy.
His creditors could argue it was not made in a good faith. When e made this investment,
he was already experiencing financial difficulty.
Note:
This requirement does not an individual from investing a segregated fund in good times.
In case, down the road they experience financial difficulty.
What it prevents is making an investment while they are having financial difficulty purely
to avoid creditors.
✔✔Bonnie has invested $10,000 into a Segregated Fund with the deposit having been
made in good faith several years ago but she is now facing financial diverticulitis.
Bonnie is planning on making his friend as revocable beneficiary on his Segregated
Fund Contract. The moment his bankruptcy is discharged, he is going to change the
beneficiary back to himself.
Clearly, Bonnie is naming Clyde temporarily as beneficiary in an attempt to avoid
creditors.
Will this work? What rules in place to prevent it?
LLQP - SFA VL 08 - ✔✔Once you've named someone an irrevocable beneficiary, you
cannot change the beneficiary without permission! So, Bonnie has to think twice about
naming Clyde as irrevocable beneficiary.
,✔✔Creditor proofing is designed to protect the contract holder (the investor) and can be
waived.
Why would a contract holder want to waive creditor proofing?
LLQP - SFA VL 08 - ✔✔For example,
To save his business, Lloyd applied for a $10,000 bank loan. The bank was willing to
give him the load but they needed collateral.
In order to provide his Segregated Fund as collateral for that loan, he need to waive
creditor proofing by signing a Collateral Assignment
✔✔Collateral Assignment
LLQP - SFA VL 08 - ✔✔
✔✔Why are they called "Segregated Funds"?
LLQP - SFA VL 09 - ✔✔The assets of a Segregated Fund are kept separate
(segregated) from the assets of the insurance company.
✔✔What would happen if the Segregated Fund issuer were to go bankrupt?'
LLQP - SFA VL 09 - ✔✔The assets of the fund would be available for the unit holders
because they were kept separate (segregated) from the assets of the insurance
company.
But, the insurance company would no longer be around to honour the guarantees.
Example:
Dudley invested $25,000 into a Segregated Fund that offered a 100% guarantee upon
death or upon the 10 year maturity mark.
Upon his death, the contract had a market value of only $20,000 and the insurance
company filed for bankruptcy.
What would happen now?
The assets of a Segregated Fund would have been kept separate, or segregated, from
the assets of the insurance company. So, the $20,000 market value of the investment
would still be available for the unit holder.
However, the insurance company is no longer honor the shortfall and the guarantees.-
>Assure can address this risk
, ✔✔Assuris
LLQP - SFA VL 09 - ✔✔A protection fund will step into the shoes of the insurance
company and honour the guarantee.
The Coverage for Segregated Funds is the GREATER of:
- 100% of the promised amount(the guarantee) up to $60,000; or
- 85% of the promised amount (the guarantee)
✔✔Segregated Funds are also known as?
LLQP - SFA VL 09 - ✔✔- Seg Funds
- Individual Variable Insurance Contracts (IVICs):
Segregated fund is a contract with insurance Company and the value of that contract
will vary based on how the investments perform
✔✔If there a medical underwriting when buying a segregated fun?
LLQP - SFA VL 09 - ✔✔With the segregated fund, all the insurance company is doing is
guaranteeing what you had in the first place.
For example:
Peter invested $10,000 into Segregated Fund that guaranteed 75% upon death or upon
the 10 year maturity mark.
- Even though there is a death benefit guarantee that could translate into a death
benefit, they do not do medical underwriting because all the insurer is doing is
guaranteeing all or a portion of what he has in the first place.
- It is not like Life Insurance where you pay a small monthly premium and upon death, it
translates into a large death benefit. In that case, the insurance company would have a
concern for your health.
✔✔LLQP - SFA VL 09 - ✔✔The segregated fund is a contact with insurance company
so
- you must be of legal age to enter into a contract!
-
An insurance company would be comfortable selling a Segregated Fund to a 30 year
old with a 100% guarantee upon death because they know:
- It's unlikely a 30 year old is going to die in 10 years, and
- A good performing equity fund should have a positive return over a long enough time
span.
