Segregated Funds & Annuities Mock Exam Latest Update Graded A+

Segregated Funds & Annuities Mock Exam Latest Update Graded A+ Group Registered Retirement Savings Plan (GRRSP) GRRSPs offer investors a limited variety of investment choices, but they have lower fees compared with individual RRSPs. Cancellation of Segregated Fund Contract 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. The investor receives the lesser of the amount of premium paid or value of fund units on that date if it is a valuation date. If it is not a valuation date, then the value on the next valuation date applies. Advanced Deferred Life Annuity (ADLA) A lifetime limit of 25% of the value of the qualifying plan, to a total of $150,000 applies to ALDA purchases. The ALDA has the ability to defer payments until the end of the year in which the annuitant reaches 85. Therefore, the ALDA addresses longevity risk and ensures that investors with an RRIF do not deplete their savings prematurely during retirement. Defined Contribution Pension Plan (DCPP) Because the money in the DCPP is locked in, it can only be transferred into another locked-in account or left in the current DCPP. A variable payment life annuity is an option for members of a DCPP. Registered Retirement Investment Fund (RRIF) The minimum percentage of an RRIF account that must be withdrawn yearly starts at age 65 and extends until age 95. The percentage range starts at 4% at age 65 and goes to 20% at age 95. (4.7.2) Group Savings Plans Groups that offer savings and investment plans to their members include employers, associations, and fraternal organizations. Group plans are most often associated with employers. The six fundamental types of group savings plans are: Defined benefit pension plan (DBPP) Defined contribution pension plan (DCPP) Group registered retirement savings plan (GRRSP) Deferred profit sharing plan (DPSP) Tax-free savings account (TFSA) Pooled registered pension plan (PRPP) Deferred Profit Sharing Plan (DPSP) Deferred Profit Sharing Plan (DPSP) cannot be withdrawn with the Home Buyers Plan (HBP), and a withdrawal from the DPSP would trigger income taxes. Balanced Funds Balanced funds are also known as balanced growth or balanced income funds. A balanced growth fund emphasizes stocks. A balanced income fund emphasizes bonds. A balanced income fund would invest in more bonds than equities, providing mostly income, but some growth. A balanced growth fund would primarily provide growth with some income, while a small-cap fund would provide only growth and a money market fund would provide minimal income and no growth. Variable Payment Life Annuity (VPLA) Transfers are made directly from each type of plan if the plan administrator has established a VPLA arrangement. A minimum of 10 retired members is required to implement the annuity. The VPLA requires that periodic payments begin by the end of the year in which the member turns 71 or the end of the calendar year in which the VPLA is acquired. This form of annuity may be subject to provincial pension benefits standards legislation. Accumulation Annuity Members of a GRRSP may be provided with the investment option of an accumulation annuity for their savings. The annuity pays guaranteed interest for a fixed term or a date specified by the investor. Members may also be given the payout option in the form of a term or life annuity when the contribution terminates. The only investment option is the accumulation annuity. The accumulation annuity contract requires its owner to make choices that centre on its role as an investment and the term for investment. Designating where and when the payments are to be received is not necessary until the policyholder begins to receive the annuity payments. A POA is a good idea but not required. Agent Expectations The agent is expected to meet all expectations of the carrier for volume of business, client contact, accuracy in dealing with the carrier and clients, and necessary record keeping. Segregated Funds Segregated funds offer the guarantee that 75-100% of the capital invested will be paid to the beneficiary. There is no medical underwriting of an application for a segregated fund contract. This means that the health of the contract's policy owner or annuitant is not assessed because guarantees are based on the strength of the investment and not on a person's life. Both segregated funds and life insurance pay out the stated benefit and both are creditor-protected. Unlike segregated funds offered to individual investors, segregated funds for group members have no sales charges. This means that savings can be invested in full, without a sales load. They also do not charge switch fees for group members. The MER on group-provided segregated funds is generally lower than the MER paid by individual investors. This is due to the primary disadvantage of group segregated funds; they do not offer a maturity or death benefit guarantee or group plan special rates. Segregated funds are insurance products, so if a beneficiary has been named, upon the death of the annuitant, the proceeds go directly to the beneficiary, bypassing the probate process. Segregated funds are redeemable on each valuation day. Therefore, the account value can be received by the beneficiary within days instead of the months it takes when an estate must go through probate. An investor who wants to switch his account value from one fund to another may do so with a segregated fund investment, aided by the life insurance agent who recommended the fund investment. Spousal Registered Retirement Savings Plan (Spousal RRSP) When a spousal RRSP is set up, the owner and the annuitant is the person who benefits from the deposits to the plan. The person who contributes does not have ownership rights. The owner names the beneficiary of the account. Reset Reset is a process that locks in the higher market value of a fund and insulates the policyowner from market declines. The reset has two effects: it increases the value of the maturity and death benefit guarantees and changes the contract's maturity date. Preferred Stocks Stock is issued in two forms: preferred stock (or shares) and common stock (or shares). Dividend payments must be paid to preferred stockholders before they are paid to common stockholders. Preferred stocks also do not usually give voting rights to stock owners, and therefore a preferred stock owner has no say in the management or operation of the company. Common stock owners have voting rights that allow them to express their wishes regarding the company at the annual general meeting. Adjusted Cost base The adjusted cost base of an account is the sum of the principal deposited minus the principal withdrawn plus allocations. Prescribed Annuity There are a number of requirements that must be satisfied for annuity income to be prescribed. They include: Annuity cannot be indexed Annuitant and policy owner must be the same person unless the annuity is joint life, with a spouse or sibling named as co-annuitant Payments must begin no later than December 31 of the year following the purchase date. Front-End Load (FEL) An investor who switches funds where each fund charges the same load, such as a front-end load (FEL), will not incur a fee for the switch. However, there may be a fee for switching between funds with dissimilar loads, such as switching from funds with a deferred sales charge (DSC) to funds with an FEL. Guaranteed Investment Certificates (GIF) Guaranteed investment certificates do not offer creditor protection. Management Expense Ratio (MER) Like mutual funds, a MER is also charged against ETF shares. However, the MER for ETF shares is significantly lower than the MER of mutual funds or segregated funds. Impaired Annuity With a medical certificate proving substandard health and all other things being equal, an annuity quote can have higher income payments than traditional annuities. The duration of risk is reduced for the insurer, so the income is likely higher for the annuitant. T-90 Annuity The T-90 annuity removes all market risk and, given that there is a defined end date, the payment from a T-90 annuity will be greater than the life annuity. Inflation Risk Inflation risk occurs when an investor loses purchasing power over time because the rates of return of their investments are too low (i.e., lower than the rate of inflation). Investments that experience inflation risk include money market funds, vehicles with guaranteed returns, as well as some types of bonds. Registered Pension Plan he pension value of an RPP must be transferred to a locked-in account and no withdrawals can be made until the specified retirement age. RRP & DPSP Contributions Contributions made to an RPP or a DPSP will generate a pension adjustment, which will reduce an individual's RRSP contribution room. Equity Fund The equity fund is invested in small-cap equities and would be likely to not pay income. The returns would more likely be capital gains, which are taxed at a lower rate. Annuity Advantages An annuity offers several advantages that are not available when investing in a mutual funds RRIF: Investment concept is simple to understand Securities for income can be adjusted to suit the client Creditor protection Estate planning benefits Annuitant protection from Assuris Group Segregated Funds Segregated funds available to group members have a number of distinct characteristics compared to segregated funds available on a personal basis. The MER on group-provided segregated funds is generally lower than the MER paid by individual investors. This is due to the primary disadvantage of group segregated funds; they do not offer a maturity or death benefit guarantee or group plan special rates. The absence of these guarantees increases the risk of investment loss for group members. Exchange-Traded Funds There are many advantages of ETFs which include: Diversification; Convenience of trading like stocks; High degree of transparency with holdings disclosed daily; Lower MER than mutual funds and segregated funds; No sales load; Professional management; Ability to react rapidly to market developments and speculation on short-term price movements; Ability for advanced trading transactions such as limit, stop loss, margin and short sale orders, options, and sector rotation; Exposure to commodities provided to small investors. Assuris Assuris provides a 100% guarantee if the guaranteed amount is $60,000 or less. For guaranteed amounts greater than $60,000, Assuris provides a guarantee that is equal to the greater of 85% of the guaranteed amount or $60,000. Group Administrators The group administrator's responsibilities include: Enrolling new members; Ensuring contributions are met; and Processing withdrawal requests. The administrator is not responsible for investment choices in a DCPP, providing travel insurance advice, or advising an employee on their RRSP limits.