Chapter 20 Segregated Funds Questions and Answers 100% Pass

Chapter 20 Segregated Funds Questions and Answers 100% Pass Which body is responsible for ensuring that federally regulated insurance companies are adequately capitalized under the requirements of the federal Insurance Companies Act? A. CLHIA 0% B. Assuris C. OSFI D. IIROC C.A federal regulatory body, the Office of the Superintendent of Financial Institutions (OSFI), is responsible for ensuring that federally regulated insurance companies are adequately capitalized. The federal Insurance Companies Act governs these solvency requirements. Segregated fund contracts are subject to the OSFI guidelines on guarantee provisions. These rules are set out in OSFI's guidelines respecting equity-linked insurance and annuity contracts with guaranteed benefits. Select the correct statement about guaranteed minimum withdrawal benefit (GMWB) plans. Student Response Value Correct Answer Feedback A. GMWB plans are pure insurance products. B. GMWB plans provide a guaranteed minimum annual payout no matter how the fund performs. C. These plans are especially suitable for clients with 10 to 20 years to retirement. 0% D. GMWB plans allow investors to hold a diversified portfolio of segregated funds through a single investment. B. GMWB plans provide a guaranteed minimum annual payout - typically 5% to 7% of the amount invested - no matter how the investments perform. GMWB plans are a combination of investments and insurance. These plans are especially suitable for clients with 5 to 10 years to retirement, who cannot afford significant losses in their portfolio during that time. Portfolio funds, which invest in other funds instead of buying securities directly, allow investors to hold a diversified portfolio of segregated funds through a single investment. 3. How can the designation of an irrevocable beneficiary be changed? Student Response Value Correct Answer Feedback A. Cannot be changed unless done so by an attorney. B. Can only be made in the segregated fund contract itself. C. Can only be changed with the consent of the beneficiary. 100% D. Cannot be changed. C. In the case of an irrevocable designation, changes in the rights of a beneficiary are subject to his or her consent. The designation of an irrevocable beneficiary can be made in several ways. It is normally made in the segregated fund contract itself. It can also be made in the contract holder's will, or in some other written form. 4. How is the basic amount of a 100% death benefit offered by a segregated fund determined? Student Response Value Correct Answer Feedback A. The value of the original investment. 0% B. The value of the original investment plus compound earnings. C. The difference between net asset value of the fund at death and the original investments. D. The difference between the net asset value at the previous reset date and the original investments. C. The basic principle behind the death benefits offered by a segregated fund is that the contract holder's beneficiary or estate is guaranteed to receive payouts amounting to at least the original investment of the contract holder. The basic amount of the death benefit is equal to the difference, if any, between the net asset value of the fund at death and the original amounts invested. If the contract has been reset, the death benefit is the difference between the net asset value of the fund and the reset value. How do segregated funds offer creditor protection? Student Response Value Correct Answer Feedback A. They are deemed to be owned by the beneficiary. 0% B. They are deemed to be owned by the annuitant. C. They are held in registered plans. D. They are insurance policies. D. Segregated funds may offer protection from creditors that is not available through other forms of managed investment products such as mutual funds. Creditor protection stems from the fact that segregated funds are insurance policies. As such, ownership of the fund's assets resides with the insurance company rather than the contract holder. Insurance proceeds generally fall outside of bankruptcy legislation. Death benefits conferred by segregated funds are not subject to medical examinations but may have an age exclusion. What is an example of an age exclusion? Student Response Value Correct Answer Feedback A. For deposits made beyond a specified age, death benefits are reduced. B. Deposits may never be accepted beyond 65 years of age. C. Death benefits are never payable if the annuitant is more than 70 years of age at death. 0% D. Death benefits are never payable if the annuitant is 80 years or older at death. A.Unlike some life insurance policies, the death benefits conferred by segregated funds are not subject to medical examinations or any other health-related conditions. However, the death benefits commonly have other types of conditions or exclusions that may eliminate or reduce payouts to the beneficiary. The most common exclusion is based on age. Once the insured person reaches a certain age, the beneficiary may lose eligibility for death benefits, or may be required to accept a reduced percentage of benefits. In the event of default of one of its members, what protection does Assuris provide to segregated fund holders? Student Response Value Correct Answer Feedback A. Assuris guarantees the value of the assets held in the fund. 0% B. Assuris guarantees death and maturity benefits to a maximum of $60,000 or 85% of the promised guaranteed amount, whichever is higher. C. Assuris guarantees commitments of contracts at the time of default. D. Assuris guarantees death and maturity benefits for Canadian residents only. B.The Assuris guarantee covers only the death benefits and maturity guarantees applicable to a segregated fund contract. The assets of the funds themselves are not eligible for Assuris protection because they are segregated from the general assets of the insurance company. As such, segregated fund holders enjoy a built-in form of protection against an insurance company's insolvency. Assuris' role is to "top up" any payments made by a liquidator to fulfill the insurance obligations under a segregated fund contract. The Assuris guarantee applies only in the event of death or at the end of the contract term. In all other instances, there is no guarantee. Score: 0/1 A client invested $200,000 as a lump sum deposit, reset after 3 years when the market value was $275,000 and when the policy matured 10 years later, the market value was $265,000. What are the tax consequences of these transactions? Student Response Value Correct Answer Feedback A. $75,000 capital gain at reset and a $10,000 capital loss at maturity. B. $65,000 capital gain at maturity. C. $75,000 capital gain at maturity. 100% D. Neither a capital gain nor loss as these contracts are non-taxable. C.No capital-gains liability is triggered at the time of the reset. However, at the time of redemption, the capital gain of $75,000 (total proceeds at redemption less the original cost of $200,000) is taxable in the year in which it is paid out. The total proceeds in this example are the $265,000 market value at maturity plus the $10,000 maturity guarantee. One might assume that the difference between the reset value ($275,000) and the proceeds of the fund ($265,000) should be considered a capital loss. The problem with this consideration is that a $10,000 capital loss in this case would offset $10,000 of the capital gain, leading to a capital gain of just $65,000 ($265,000 - $200,000 = $65,000). But the investor received $275,000 in total, which is $75,000 greater than the original investment. The capital gain therefore must be $75,000. Classifying the difference between the proceeds and the original cost as a capital loss only occurs when the proceeds are less than the original cost. Martha redeems a segregated fund that she purchased 12 years ago with a 100% guarantee. The adjusted cost base of the fund is $50,000, while the market value of the policy at maturity is $40,000. Which of the following statements about the taxation of Martha's segregated fund is true? Student Response Value Correct Answer Feedback A. The maturity guarantee is not taxable. B. The maturity guarantee of $10,000 is fully taxable as interest income. 0% C. Only $5,000 of the capital gain is taxable. D. The capital gain is fully offset by the capital loss incurred. D. Payments from a segregated fund contract s maturity guarantees are taxable. The amount of tax payable depends on whether the proceeds, minus any sales charges, exceed the cost of the contract. The cost of the contract, known as the adjusted cost base, consists of the original amounts deposited and any net income or capital gains (or capital losses) allocated to the policy. If the proceeds of the contract (after commissions) are less than the adjusted cost base, income tax is payable on the guaranteed amount. However, the contract holder can use the difference between the market value of the segregated fund and the adjusted cost base as a capital loss. Bob Smith, who is married with 2 minor children, is the contract holder of a segregated fund held in his RRSP. By law, who must be the annuitant of the contract? Student Response Value Correct Answer Feedback A. Bob. 100% B. Bob's spouse. C. Bob's children. D. Bob's spouse and children jointly. A.When the contract is held outside a registered plan such as an RRSP, the contract holder does not have to be the person whose life is insured by the contract. When the contract is held in a registered plan, the contract holder and the annuitant must be the same person. Alan purchased a segregated fund 10 years ago with the minimum provincial maturity guarantee. The adjusted cost base of the fund is $100,000, while the market value of the policy at maturity is $85,000. How much will Alan receive when he redeems the fund at maturity? Student Response Value Correct Answer Feedback A. $63,750 B. $75,000 0% C. $85,000 D. $100,000 C.The minimum provincial maturity guarantee is 75% of the amount invested. In Alan's case, he invested $100,000 and at the time of redemption, the proceeds of the fund were $85,000. Since $85,000 exceeds the maturity gurantee of 75% of the amount invested, the total amount Alan receives upon maturity is $85,000. The investment income of a segregated fund contract is deemed to be the income of what party? Student Response Value Correct Answer Feedback A. The fund. B. The contract holder. 100% C. The annuitant. D. The beneficiary. General Feedback: The fund's net income - whether in the form of dividends, capital gains or interest - is deemed to be the contract holder's income. The amount of income deemed to have been earned by each contract holder is calculated using a procedure known as allocation. A percentage of the fund's total income is allocated to each unit, according to the terms of the segregated fund contract. Score: 1/1 B. The fund's net income - whether in the form of dividends, capital gains or interest - is deemed to be the contract holder's income. The amount of income deemed to have been earned by each contract holder is calculated using a procedure known as allocation. A percentage of the fund's total income is allocated to each unit, according to the terms of the segregated fund contract. Score: 1/1 What is the minimum amount of the initial principal amount that the holder of a GMWB must receive? Student Response Value Correct Answer Feedback A. 0% B. 75% C. 85% D. 100% 100% General Feedback: With a GMWB (Guaranteed Minimum Withdrawal Benefit) plan, the holder is guaranteed that he or she will receive at a minimum the initial principal amount. If the holder experiences investment growth, he or she will receive amounts above the initial principal amount; if the holder experiences investment losses, he or she will still receive the initial principal amount in withdrawals. Score: 1/1 D.With a GMWB (Guaranteed Minimum Withdrawal Benefit) plan, the holder is guaranteed that he or she will receive at a minimum the initial principal amount. If the holder experiences investment growth, he or she will receive amounts above the initial principal amount; if the holder experiences investment losses, he or she will still receive the initial principal amount in withdrawals. The guidelines of which regulatory body serve as the primary regulatory requirements for segregated fund contracts sold in each Canadian province and territory? Student Response Value Correct Answer Feedback A. Assuris. B. Federal Insurance Regulators Association (FIRA). C. Office of the Superintendent of Financial Institutions (OSFI). D. Canadian Life and Health Insurance Association Inc. (CLHIA). D. For the most part, segregated fund contracts are subject to the provincial legislation governing all life insurance contracts. Each province and territory has accepted the Canadian Life and Health Insurance Association Inc. (CLHIA) guidelines as the primary regulatory requirements. Federal insurance regulators do not regulate the sale of segregated funds. What condition must exist for a segregated fund contract to be eligible for creditor protection? Student Response Value Correct Answer Feedback A. A beneficiary must be named. B. An irrevocable beneficiary must be named. 0% C. The contract must be registered. D. The annuitant must be the contract holder. In order for the assets held in the contract to be eligible for creditor protection, a few conditions must be met. The purchase must not be made with the intention of avoiding potential creditor action, and a beneficiary must be named.