LLQP Seg Funds cheat sheet

A segregated fund is an individual variable insurance contract (IVIC): the policyholder owns an insurance contract issued by a life insurer, not units of the underlying portfolio.

The maturity guarantee pays 75% or 100% of net deposits (deposits less withdrawals) on the maturity date, commonly 10 years after the deposit date.

The death benefit guarantee pays 75% or 100% of net deposits, or market value if higher under most contracts, when the annuitant dies.

Withdrawals reduce both guarantees proportionally: a 10% withdrawal reduces the guaranteed amount by 10%, not by the dollar amount taken out.

Resets recalculate the guarantee to current market value; automatic resets occur on scheduled dates, client-directed resets on request, and a reset may restart the maturity period.

Guarantees are payable only at maturity or death; redemption before those events pays market value, which may be below total deposits.

A named beneficiary receives the death benefit directly, generally outside the estate and outside probate.

Guarantee level, reset frequency and fees are contract-specific: two contracts holding the same underlying fund can carry different guarantees and costs.

OSFI supervises the solvency and financial condition of federal life insurers; provincial insurance regulators (for example FSRA, AMF, BCFSA) license advisors and oversee market conduct.

The insurer must deliver the information folder and the Fund Facts for each fund before or at the point of sale.

The information folder describes the contract, guarantee mechanics, fees, fund objectives and risks; the Fund Facts summarizes one fund's performance, risk rating and cost.

Contract holders must receive a statement at least annually showing contract value, deposits, withdrawals, guarantees and transactions.

Advisors must complete KYC, know the product, and document the suitability of each recommendation.

Compensation, conflicts of interest and referral arrangements must be disclosed to the client.

Federal privacy legislation (PIPEDA) and anti-money-laundering and terrorist-financing rules govern client identification and record keeping.

Clients must have access to the insurer's complaint-handling process and to an independent dispute-resolution service.

A non-registered segregated fund is an exempt policy: interest, dividends and realized gains are allocated and taxed to the policyholder each year, whether or not cash is withdrawn.

Annual income allocations are reported to the client on a T3 slip and increase the contract's adjusted cost base (ACB).

ACB begins at total deposits, increases by income already taxed, and decreases proportionally when withdrawals are made.

A redemption or death benefit above ACB produces a policy gain taxed as ordinary income at the client's marginal rate, with no 50% capital gains inclusion.

If the beneficiary is the spouse or common-law partner, a tax-deferred rollover is generally available under subsection 148(8) of the Income Tax Act.

In registered contracts (RRSP, RRIF, TFSA, RESP) annual income is not reported on a T3, and taxation follows the registered plan's rules.

For registered contracts other than TFSAs the ACB used in withdrawal taxation is generally nil, so the full amount withdrawn is taxable.

The insurer reports a policy gain on a tax slip; the client includes it in income for the year of the disposition.

Needs analysis begins with the purpose: estate preservation, retirement income, creditor protection, probate avoidance, or protection against a market decline.

Guarantees are date-specific, so the date the client needs the money should fall at or after the maturity date, commonly 10 years after deposit.

Quantify assets, liabilities, cash flow, existing insurance coverage and tax exposure before selecting any product.

Assess willingness (risk tolerance) and ability (financial capacity) to withstand market losses separately, because they can differ.

Identify who is named as beneficiary; if the estate is named, proceeds pass through probate and are exposed to the estate's creditors.

Compare the cost of the guarantee with the benefit the client actually needs; a 75% guarantee costs less than a 100% guarantee.

Document the need identified, the assumptions used and how the recommendation addresses that need in the client file.

KYC data includes age, income, net worth, liquidity needs, time horizon, investment knowledge, risk tolerance, objectives and constraints.

KYP data includes the fund's mandate, benchmark, volatility, MER, guarantee level, reset rules and the insurer's financial strength.

A recommendation needs a documented, reasonable basis linking KYC and KYP; the file must show the reasoning, not just the outcome.

Guarantee cost rises with the protection level and reset frequency; match the level to the identified need rather than defaulting to the highest.

Check concentration in a single fund or sector and across the client's total holdings, including group plans and products from other insurers.

Placement matters: registered contracts shelter income, while non-registered contracts provide guarantees and probate features on taxable assets.

Review suitability when circumstances change materially, such as job loss, divorce, serious illness or inheritance.

Products involving leverage, exotic strategies or unusually high fees require additional scrutiny and written justification.

Sequence: discovery and KYC, needs analysis, product selection, disclosure, application, underwriting, delivery, free look, and ongoing service.

Provide the information folder and Fund Facts and confirm the client understands the guarantees, fees and risks before signing the application.

The application captures owner, annuitant, beneficiary, successor annuitant, guarantee options, fund allocation and KYC data.

Verify the client's identity and screen for money laundering, terrorist financing and sanctions before the file is submitted.

Obtain all required signatures, including replacement and disclosure forms, and give the client copies of everything signed.

The free-look or cancellation right allows the client to cancel within the period set by provincial law after receiving the contract.

Explain that the maturity guarantee is unavailable on early redemption and that statements should be reviewed when received.

Record the advice given, the client's instructions and any recommendations the client declined.

A replacement exists whenever new coverage or a new segregated fund contract substitutes for existing insurance or segregated fund holdings.

Complete the replacement form and compare old and new on guarantees, fees, surrender charges, death benefit, beneficiaries and tax consequences.

Quantify the cost of switching: surrender or redemption charges, new sales charges, loss of grandfathered guarantees and any taxable policy gain triggered this year.

Some provinces require notice to the existing insurer and a delay before the new contract takes effect.

The file must document why the replacement is suitable despite any lost features or added costs.

Ongoing service includes at least an annual review of performance, guarantee levels, reset opportunities, asset mix and beneficiary designations.

Update the file after life events such as marriage, divorce, birth, death, retirement or job change, and confirm beneficiary changes with the insurer.

Retain records of all reviews, client communications and complaints, and escalate unresolved complaints through the insurer's complaint process.