IFC Segregated Funds 2 — Questions and Answers
Question 1: What does a 'reset' option in a segregated fund allow the contract holder to do?
- Switch the contract to a different insurance company without penalty
- Lock in a higher current market value as the new guarantee base (Correct answer)
- Reset the management expense ratio after a period of poor performance
- Transfer accumulated units to a RRSP without tax consequences
Correct answer: Lock in a higher current market value as the new guarantee base
A reset option permits the contract holder to lock in a higher current market value as the new base for the maturity or death benefit guarantee, effectively ratcheting up the guaranteed minimum.
Question 2: An investor deposits $100,000 into a segregated fund with a 75% maturity guarantee. If the fund falls to $60,000 by maturity, how much will the investor receive?
- $60,000 — the current market value
- $75,000 — the guaranteed minimum (Correct answer)
- $100,000 — the full original premium
- $85,000 — the average of current and original value
Correct answer: $75,000 — the guaranteed minimum
The 75% maturity guarantee ensures the investor receives at least $75,000 (75% of $100,000) regardless of market performance.
Question 3: Which of the following best describes the death benefit guarantee in a segregated fund?
- It guarantees investment growth above the rate of inflation upon death
- It ensures beneficiaries receive at least the guaranteed minimum even if the fund value is lower (Correct answer)
- It eliminates management fees charged upon the annuitant's death
- It allows tax-free transfer of all assets to beneficiaries
Correct answer: It ensures beneficiaries receive at least the guaranteed minimum even if the fund value is lower
The death benefit guarantee ensures beneficiaries receive the greater of the current fund value or the guaranteed minimum (typically 75–100% of net premiums) upon the annuitant's death.
Question 4: How does naming a beneficiary directly on a segregated fund benefit the contract holder's estate plan?
- It increases the fund's guaranteed return rate by 0.5%
- It allows death proceeds to bypass the estate, potentially avoiding probate fees (Correct answer)
- It reduces the annual management expense ratio
- It provides a deduction against the contract holder's taxable income
Correct answer: It allows death proceeds to bypass the estate, potentially avoiding probate fees
Proceeds paid directly to a named beneficiary bypass the estate, avoiding probate fees and potentially expediting the transfer of funds to heirs.
Question 5: What happens to a segregated fund's maturity guarantee if the contract holder makes a partial withdrawal?
- The guarantee remains completely unchanged
- The guarantee is proportionally reduced based on the amount withdrawn (Correct answer)
- The guarantee is fully eliminated once any withdrawal occurs
- The guarantee is doubled to compensate for the reduced balance
Correct answer: The guarantee is proportionally reduced based on the amount withdrawn
Partial withdrawals reduce the net premiums paid calculation, proportionally lowering the maturity guarantee since the guarantee is tied to net premiums (contributions minus withdrawals).
Question 6: Which type of investor would benefit MOST from the potential creditor protection offered by segregated funds?
- A retired government employee with a defined benefit pension
- A self-employed professional or business owner with personal liability exposure (Correct answer)
- A salaried employee with comprehensive employer benefits
- A foreign investor seeking offshore tax advantages
Correct answer: A self-employed professional or business owner with personal liability exposure
Self-employed individuals and business owners face greater personal creditor risk, making the potential creditor protection of segregated funds with named beneficiaries particularly valuable to them.
Question 7: If an investor exercises a reset option on a segregated fund when the market value has increased, what is the primary consequence?
- The contract term is extended by another 10 years from the reset date (Correct answer)
- The management expense ratio increases to reflect the higher guarantee base
- The original maturity date is moved forward by 5 years
- The contract is immediately redeemed at the higher value
Correct answer: The contract term is extended by another 10 years from the reset date
When a reset is exercised, the new 10-year maturity guarantee period restarts from the reset date, which means the contract term extends — a key trade-off of using the reset feature.
IFC Segregated Funds 2
What does a 'reset' option in a segregated fund allow the contract holder to do?