The Guarantee That Shrinks
Walter, 74, holds $300,000 of deposits in a segregated fund contract inside his RRIF. The contract carries a 100% death benefit guarantee, a 75% maturity guarantee and a 10-year term; he is in year seven. Market value today is $246,000. The contract allows a reset on each anniversary and permits resets up to age 80. Walter needs $60,000 for a condo renovation and is choosing between withdrawing it from the seg fund, moving the whole $246,000 into a five-year GIC at 4.1%, or borrowing the money. He is in good health and expects to live into his nineties. His daughter is the beneficiary named on the contract; his will leaves everything to his second wife.
1. Calculate the effect of a $60,000 withdrawal on the maturity and death benefit guarantees.
Read the worked answer
Guarantees are reduced proportionally, not dollar for dollar.
- Withdrawal as a share of market value: $60,000 ÷ $246,000 = 24.4%.
- Current maturity guarantee: 75% × $300,000 = $225,000. After the withdrawal: $225,000 × (1 − 0.244) ≈ $170,100.
- Current death benefit guarantee: $300,000. After: $300,000 × 0.756 ≈ $226,800.
- Remaining market value: $186,000.
So $60,000 of cash costs him about $54,900 of maturity guarantee and $73,200 of death benefit guarantee. Note that the remaining market value ($186,000) now sits above the reduced maturity guarantee ($170,100), so the maturity guarantee only matters if markets fall further. Two smaller withdrawals cost the same as one large one - the reduction is proportional either way - but a withdrawal from a registered contract is taxable income, which is a separate cost he must plan for.
2. Should Walter accept a reset at the next anniversary? Explain the reasoning.
Read the worked answer
No - a reset now would lower his guarantee. A reset replaces the guaranteed amount with a percentage of the current market value where that is higher than the existing guarantee. Here 75% of $246,000 = $184,500, against an existing maturity guarantee of $225,000. Resetting would destroy $40,500 of guarantee.
A reset only adds value after markets have risen enough that the new guaranteed amount exceeds the old one - it locks in gains at the top, it does not repair losses at the bottom. Walter is still eligible at 74 (the contract cuts off at 80), so he can wait and reset later if the value recovers. At year ten the contract matures and the maturity guarantee is paid if the value is below it - the 75% floor is the reason to hold rather than panic-sell.
3. Walter is also considering the GIC, and asks what his daughter will actually receive. What should the agent explain?
Read the worked answer
GIC versus seg fund: the GIC locks a known 4.1% but gives up the maturity guarantee, the 100% death benefit guarantee and any equity growth. With a life expectancy into his nineties, inflation and a long horizon argue against locking everything into a five-year term; a split, keeping some guarantee exposure, is usually the more defensible recommendation. Fees on the seg fund are higher and must be disclosed.
The beneficiary conflict is the bigger issue. The contract names the daughter; the will leaves everything to the second wife. Seg fund proceeds pass outside the will to the named beneficiary, so the second wife receives nothing from this contract, and in a RRIF the full fair market value is generally included in income on his final return unless a spouse is a successor annuitant. The result is that the daughter gets the after-tax proceeds while the will says otherwise. Walter must be told this explicitly and decide which outcome he actually wants; if he changes the designation, it must be done on the insurer's form, and the agent should document the instruction.