Segregated Funds and Annuities (SFA)
What is Segregated Funds
LLQP - SFA VL 01 - answer Segregated Fund is also an investment. it is just a fancy
version of mutual fund.
Segregated Fund is an insurance product, and it is an investment. Segregated Funds
offer some unique features that mutual funds generally do not, such as:
- Guarantees
- Ability to BY-Pass Probate
- Creditor Proofing
A segregated Fund is a great product but remember it's not Life Insurance! rather, it's
an investment somewhat similar to a Mutual Fund.
Guarantee in Segregated Funds
LLQP - SFA VL 01 - answer With the segregated funds, the funds must guarantee
- A minimum of 75% if the investor's principle at death, or
- Upon a 10-year maturity mark
- Some Segregated Funds even guarantee as much as 100% at death or at the 10-year
mark.
As an investor, all the insurer is doing is guaranteeing what he put in.. what about
growth?
This guarantee is only for peace of mind. The investor does hope that they have
positive returns, but worst case scenario. they have some level of guarantee upon death
or upon 10-year maturity mark.
Sally and Jacob are married and have a new born daughter. Jacob will be the only
income earner in the family and currently earns $50,000 per year. What would happen
to their young family if Jacob dies permanently?
They have $200 available in their monthly budget and wanted to protect against this
risk.
They considered:
- Life insurance
- Segregated Fun Investment
One month later Jacob, died.
,What would have happened if they bought
1. life insurance policy
2. Segregated Fund Investment
LLQP - SFA VL 01 - answer 1. Purchase Life Insurance:
Based on his age, let's assume $200 per month would have purchased a $1,000,000
life insurance [policy.
- Upon Jacob's death, Sally would receive death benefit of $1,000,000.
- this would be enough If invested properly, it would likely replace Jacob's income so
Sally and father would be taken care of.
2. Invest in a Segregated Fund:
It has only been one month, so they would have been invested total investment of $200.
- The fund would guarantee a minimum of 75% of their total investment or current
market value.
-The bottom line is, Sally would receive approx $200 which is clearly not enough
Assume that Amanda has $5000 in her bank account that she would like to invest in a
stock market for several years to achieve growth.
What issues could Amanda face when she only $5,000 to invest in the stock market?
LLQP - SFA VL 02 - answer 1. Not enough knowledge/expertise to do the appropriate
research
2. Even if she has expertise, she may not have enough time to pick stocks or it may not
be justified for small investment
3. Not enough money to achieve a fully diversified portfolio. Most experts would state
you need upwards of 20 different stocks in 20 different companies in order to diversify a
portfolio and $5,000 is not enough.
What is mutual fund?
LLQP - SFA VL 02 - answer 1. A mutual fund can be thought as a pot of money where
many investors contribute
2. Each investor obtains units of the fund based on how much he or she contributes.
3. The fund manager invests the portfolio according to a specific mandate. For example,
if it is a equity fund, he would in invest in equity.If it is a bond fund, he would invest in a
bond.
4. The investors can sit back and let the fund manager do their job.
5. Profit or loss is determine by the amount contributed (how many units) and the
performance of the fund.
,What are four advantages and two disadvantages associated with mutual fund?
LLQP - SFA VL 02 - answer Advantages:
1. Professional money management . A fund will hire a money manager to manage the
portfolio in accordance to the funds objective. For example, if it is a bond fund, they will
hire a bond manager.
2. Easy of investing. In any given business days, you can contact the issuer and make
an investment
3. Diversification. For example, if you are building your own stock portfolio, you would
need to invest in many different companies. But if you are investing in a fund, you are
instantly diversified by the fact the fund itself is diversified.
4. Liquidity (redemption/switched). It is relatively easy to redeem units or switch from
one fund to another.
Disadvantages:
1. fees. When you invest in a fund, you could pay load fee which is a form of a
commission or you also pay management fee.
2. Wide range of options are confusing for investors.
What are three types of fees charged by Mutual Funds
LLQP - SFA VL 03 - answer 1. Load Fees (also referred to as commissions)
1. Trailer fees
3. Management Fees
Load Fees
LLQP - SFA VL 03 - answer A "Load Fee" is a commission charged upon purchase or
redemption, but never on both.
Three types of load fees:
1. No load Funds:
it is fund that doesn't charge
commission at all. It's usually proprietary
fund issued by bank
2. Front End Load Funds:
Commission/fee charged upon
purchase and added to the purchase
amount.
, 3. Back End Load Funds:
commission/fee charged upon
redemption.For example if you make a withdraw in year 1, the load fee is quit high (i.e.
7%). The longer you have that fund, that fee is reduced to the point you can redeem
your units no back load fee would applied (i.e. 0% in 8 years)
Trailer Fees
LLQP - SFA VL 03 - answer - Sales person sell the clients mutual fund, their work
does not stop there.
- Sales person meets with client on an regular basis usually annual basis to verify the
fund is appropriate continuously .
- Trailer fee is paid to compensate the salesperson for continued service.
- Trailer fees are charged to the fund, which means they are indirectly paid by investors
Management Fees
LLQP - SFA VL 03 - answer 1. All mutual funds have manager and all charge a
management fee
2. Even no load funds charge a management fee, because they have a fund manager
that needs to be compensated.
3. The management fee is known in advance and is disclosed in various disclosure
documents to investors
4. Range from 0.5 % to as high as 3% of the net assets managed per year.
5. Determined by the level of activity the fund manager performs. Actively managed
equity fund where find manager is trying to beat the market is more work for fund
managers than money market fund where managers are following buy and hold strategy
How are the following fees are collected?
1. Management fee
2. Trailer Fee
3. Front end load (Front-end Sales)
4. Back end load
LLQP - SFA VL 03 - answer 1. Management Fee: fees are deducted from assets of
fund which indirectly it's means being paid by unit holders
2. Trailer fee: Deducted from assets of fund.
3. Front end load: Added to purchase price.
What is Segregated Funds
LLQP - SFA VL 01 - answer Segregated Fund is also an investment. it is just a fancy
version of mutual fund.
Segregated Fund is an insurance product, and it is an investment. Segregated Funds
offer some unique features that mutual funds generally do not, such as:
- Guarantees
- Ability to BY-Pass Probate
- Creditor Proofing
A segregated Fund is a great product but remember it's not Life Insurance! rather, it's
an investment somewhat similar to a Mutual Fund.
Guarantee in Segregated Funds
LLQP - SFA VL 01 - answer With the segregated funds, the funds must guarantee
- A minimum of 75% if the investor's principle at death, or
- Upon a 10-year maturity mark
- Some Segregated Funds even guarantee as much as 100% at death or at the 10-year
mark.
As an investor, all the insurer is doing is guaranteeing what he put in.. what about
growth?
This guarantee is only for peace of mind. The investor does hope that they have
positive returns, but worst case scenario. they have some level of guarantee upon death
or upon 10-year maturity mark.
Sally and Jacob are married and have a new born daughter. Jacob will be the only
income earner in the family and currently earns $50,000 per year. What would happen
to their young family if Jacob dies permanently?
They have $200 available in their monthly budget and wanted to protect against this
risk.
They considered:
- Life insurance
- Segregated Fun Investment
One month later Jacob, died.
,What would have happened if they bought
1. life insurance policy
2. Segregated Fund Investment
LLQP - SFA VL 01 - answer 1. Purchase Life Insurance:
Based on his age, let's assume $200 per month would have purchased a $1,000,000
life insurance [policy.
- Upon Jacob's death, Sally would receive death benefit of $1,000,000.
- this would be enough If invested properly, it would likely replace Jacob's income so
Sally and father would be taken care of.
2. Invest in a Segregated Fund:
It has only been one month, so they would have been invested total investment of $200.
- The fund would guarantee a minimum of 75% of their total investment or current
market value.
-The bottom line is, Sally would receive approx $200 which is clearly not enough
Assume that Amanda has $5000 in her bank account that she would like to invest in a
stock market for several years to achieve growth.
What issues could Amanda face when she only $5,000 to invest in the stock market?
LLQP - SFA VL 02 - answer 1. Not enough knowledge/expertise to do the appropriate
research
2. Even if she has expertise, she may not have enough time to pick stocks or it may not
be justified for small investment
3. Not enough money to achieve a fully diversified portfolio. Most experts would state
you need upwards of 20 different stocks in 20 different companies in order to diversify a
portfolio and $5,000 is not enough.
What is mutual fund?
LLQP - SFA VL 02 - answer 1. A mutual fund can be thought as a pot of money where
many investors contribute
2. Each investor obtains units of the fund based on how much he or she contributes.
3. The fund manager invests the portfolio according to a specific mandate. For example,
if it is a equity fund, he would in invest in equity.If it is a bond fund, he would invest in a
bond.
4. The investors can sit back and let the fund manager do their job.
5. Profit or loss is determine by the amount contributed (how many units) and the
performance of the fund.
,What are four advantages and two disadvantages associated with mutual fund?
LLQP - SFA VL 02 - answer Advantages:
1. Professional money management . A fund will hire a money manager to manage the
portfolio in accordance to the funds objective. For example, if it is a bond fund, they will
hire a bond manager.
2. Easy of investing. In any given business days, you can contact the issuer and make
an investment
3. Diversification. For example, if you are building your own stock portfolio, you would
need to invest in many different companies. But if you are investing in a fund, you are
instantly diversified by the fact the fund itself is diversified.
4. Liquidity (redemption/switched). It is relatively easy to redeem units or switch from
one fund to another.
Disadvantages:
1. fees. When you invest in a fund, you could pay load fee which is a form of a
commission or you also pay management fee.
2. Wide range of options are confusing for investors.
What are three types of fees charged by Mutual Funds
LLQP - SFA VL 03 - answer 1. Load Fees (also referred to as commissions)
1. Trailer fees
3. Management Fees
Load Fees
LLQP - SFA VL 03 - answer A "Load Fee" is a commission charged upon purchase or
redemption, but never on both.
Three types of load fees:
1. No load Funds:
it is fund that doesn't charge
commission at all. It's usually proprietary
fund issued by bank
2. Front End Load Funds:
Commission/fee charged upon
purchase and added to the purchase
amount.
, 3. Back End Load Funds:
commission/fee charged upon
redemption.For example if you make a withdraw in year 1, the load fee is quit high (i.e.
7%). The longer you have that fund, that fee is reduced to the point you can redeem
your units no back load fee would applied (i.e. 0% in 8 years)
Trailer Fees
LLQP - SFA VL 03 - answer - Sales person sell the clients mutual fund, their work
does not stop there.
- Sales person meets with client on an regular basis usually annual basis to verify the
fund is appropriate continuously .
- Trailer fee is paid to compensate the salesperson for continued service.
- Trailer fees are charged to the fund, which means they are indirectly paid by investors
Management Fees
LLQP - SFA VL 03 - answer 1. All mutual funds have manager and all charge a
management fee
2. Even no load funds charge a management fee, because they have a fund manager
that needs to be compensated.
3. The management fee is known in advance and is disclosed in various disclosure
documents to investors
4. Range from 0.5 % to as high as 3% of the net assets managed per year.
5. Determined by the level of activity the fund manager performs. Actively managed
equity fund where find manager is trying to beat the market is more work for fund
managers than money market fund where managers are following buy and hold strategy
How are the following fees are collected?
1. Management fee
2. Trailer Fee
3. Front end load (Front-end Sales)
4. Back end load
LLQP - SFA VL 03 - answer 1. Management Fee: fees are deducted from assets of
fund which indirectly it's means being paid by unit holders
2. Trailer fee: Deducted from assets of fund.
3. Front end load: Added to purchase price.
