Download Segregated Funds and Annuities: A Comprehensive Guide for Investors and more Exams Insurance law in PDF only on Docsity!
Segregated Funds and Annuities (SFA)
Latest Update Graded A+
What is Segregated Funds
LLQP - SFA VL 01 ✔✔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 ✔✔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
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 ✔✔1. Not enough knowledge/expertise to do the appropriate research
- Even if she has expertise, she may not have enough time to pick stocks or it may not be justified for small investment
- 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 0 2 ✔✔1. A mutual fund can be thought as a pot of money where many
investors contribute
- Each investor obtains units of the fund based on how much he or she contributes.
- 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.
- The investors can sit back and let the fund manager do their job.
- 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 ✔✔Advantages:
- 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.
- Easy of investing. In any given business days, you can contact the issuer and make an investment
Load Fees
LLQP - SFA VL 03 ✔✔A "Load Fee" is a commission charged upon purchase or redemption,
but never on both.
Three types of load fees:
- No load Funds:
it is fund that doesn't charge commission at all. It's usually proprietary fund issued by bank
- Front End Load Funds:
Commission/fee charged upon purchase and added to the purchase amount.
- 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 ✔✔- 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 ✔✔1. All mutual funds have manager and all charge a management fee
LLQP - SFA VL 03 ✔✔1. Management Fee: fees are deducted from assets of fund which
indirectly it's means being paid by unit holders
- Trailer fee: Deducted from assets of fund.
- Front end load: Added to purchase price.
- Deducted from the unit price
LLQP - SFA VL 04 ✔✔- Mutual Funds and Segregated Funds use a forward pricing model.
Backward pricing is prohibited.
For example,
Marmaduke is a brand new race house in her very first race and she is now running towards the finish line where ahead of the rest. The gambler saw this and went to the ticket window and says he wants to bet on Marmaduke. he was told "you can't get in on this race already has already started. you have to wait for the next race"
Treat each trading date as a mini race and if you want to get in on the middle of the day you are going to be told the same thing.
What is Forward Pricing Model
LLQP - SFA VL 04 ✔✔- Your order will be accepted but will be processed on the next valuation
point.
- If purchasing or redeeming units with this knowledge based on a previous price which is prohibited, the investors would be an unfair advantage because if you are midway through the trading date, you know how market is performing. If you can purchase or redeem your units with that knowledge based on the previous price that would be unfair.
How are Mutual Fund and Segregated units are sold or redeemed?
LLQP - SFA VL 04 ✔✔Mutual Fund and Segregated units are sold or redeemed using a Forward
Pricing Model.
AAA Real Estate fund is valued every Friday @ 6pm EST. Peter placed an order on Thursday Oct 21.
NAVPS
LLQP - SFA VL 04 ✔✔NAVPS stands for Net Asset Value Per Share or, "NAVPU" (Net Asset
Value Per Unit) is just the fancy name for price per share/unit
What is the difference between NAVP and NAVP
LLQP - SFA VL 04 ✔✔Appropriate term for Segregated Fund s is Net Asset Value per Unit
(NAVPU).
But for Mutual Funds, sometimes they use Net Asset Value per Share (NAVPS)
Assets: $10,000,
Liabilities: $2,000,
Units outstanding: $500,
MER: 4.0%
Calculate NAVPU
LLQP - SFA VL 04 ✔✔MER is the management fee plus operating expenses expressed as a
percentage. Burt we do not need MER for calculating value per unit.
NAVPU= (Assets - Liabilities)/Number of Outsourcing Units.
NAVPU= ($10,000,000 - $$2,000,000)/500,000=$
Front-end Sales Charge (Front-end Load)
LLQP - SFA VL 04 ✔✔1. The commission (load) is added to the purchase price, so each unit
will actually cost more than the NAVPU.
Assume an NAVPU of $20 and front-end load of 4$, each unit would actually cost $20.83.
- For each $20.083 paid, only $20 actually gets invested into the fund.
Can funds charge a commission both upon purchase or redemption?
With an NAVPU of $20 and back-end load of 4%, the investor would receive $19.20 upon redemption.
Assume you are withdrawing $100,000 and you are paying 4% back-end load.
How much are you going to receive?
LLQP - SFA VL 04 ✔✔$96,000 (96%) to the investor
$4,000 (4%) Back-and Load
Commissions/Loads must be disclosed to and be considered carefully by, the client.
Assume an NAVPU of $20,
- front-end sales charge(load)?
- back-end sales charge (load)?
LLQP - SFA VL 04 ✔✔- A front-end sales charge (load) is added to the purchase price, so each
unit will actually cost more than the NAVPU. E.g. NAVPU of $20, each unit will cost the investor more than $20.
- A back-end sales charge (load) is deducted from the NAVPU, so the investor will actually receive less than the NAVPU. E.g. NAVPU of $20, the investor will receive less than %20.
- A back-end sales charge (load) is deducted from the NAVPU, so the investor will actually receive less than the NAVPU. E.g. NAVPU of $20, the investor will receive less than $20.
LLQP - SFA VL 05 ✔✔There are many different mutual funds (and segregated funds) available
in Canada.
Most fall into one of several broad categories. For example, Equity Fund can be broken down into Small Cap Stock which are small company, large Cap company, etc.
For a Segregated Fund to be creditor proof, the beneficiary must be?
LLQP - SFA VL 08 ✔✔- Part of the Protected Class:
Equity
Dividend
Balanced
Bond
Mortgage
Money Market
Lowest Risk
Memory Aid: My Mortgage Broker Brought Down Every Rate Substantially.
Note:
Mutual fund(and seg fund) risk categories are generalization!
Example,
A balanced fund has a mixture of different investments it could a portion of bond and equity and mixture will impact its risk
What are three Main Features that Segregated Funds offer mutual funds don't
LLQP - SFA VL 06 ✔✔- Maturity and Death Benefit Guarantees
- Ability to By-Pass Probate
- Opportunity for Creditors Proofing
Guarantees that Segregated Funds provide
LLQP - SFA VL 06 ✔✔Segregated Funds are required by law to provide two guarantees:
- A minimum of 75% of the amount invested upon a 10 year maturity date
- A minimum of 75% of the amount invested upon death.
Some Segregated Funds will guarantee up to 100% of the amount invested upon death/or the 10 year mark!
