Louise's Guarantee That Isn't a Guarantee of Everything
Louise, 68, is widowed and in good health. She has $450,000 in a non-registered GIC maturing next month, a $220,000 RRIF from which she takes only the minimum, and a mortgage-free house. She wants "no losses" and expects to need income from the money at age 75.
Her advisor, Tariq, proposes a segregated fund contract with a 100% death benefit guarantee, a 75% maturity guarantee on a 10-year term, a current MER of 2.85% including the guarantee fee, and a 2% front-end sales charge. Louise wants to name her two adult children as beneficiaries, revocably, so the money skips probate. One son is in a consumer proposal with about $80,000 of unsecured debt.
Louise's own words: "If the guarantee is 100%, why does the fee matter? The company takes all the risk."
1. Explain precisely what the 75% maturity guarantee and the 100% death guarantee cover, and how a withdrawal changes them.
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The guarantee is on a defined base - deposits plus any permitted resets, less withdrawals - not on whatever the account happens to be worth on a good day.
Assume the contract reduces the guarantee base dollar-for-dollar for withdrawals (Tariq must confirm this in the information folder, because some contracts reduce proportionally, which produces a different number):
- Deposit: $450,000
- Withdrawals by year 4: $60,000
- Guarantee base: $390,000
- Maturity guarantee (75%): $292,500
- Death guarantee (100%): $390,000
Now the two guarantees behave very differently. The death guarantee tops up the contract's market value to the guarantee base whenever the market value is lower, so if Louise dies in year 4 with a market value of $330,000, the estate or beneficiary receives a $60,000 top-up. The maturity guarantee only applies at the end of the 10-year term, and only at 75%. If the market value at maturity is $300,000, she receives $300,000; if it is $250,000, she receives $292,500. In between, there is no guarantee to speak of - a decline to $350,000 in year 6 is simply a decline, and she cannot "lock in" the guarantee by redeeming, because redeeming at market value is a disposition, not a maturity.
Resets, where offered, raise the base but usually restart a term and may carry a fee. That is the trade-off she needs to see stated in dollars.
2. Address the fee question, the beneficiary designation, and the son's consumer proposal.
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The fee question is the heart of it. "The company takes all the risk" is not accurate. The insurer takes the tail risk of the guarantee being in the money at maturity or death; the contract holder takes the market risk up to the guarantee level, the opportunity cost, and 100% of the fees. At 2.85% on $450,000, that is about $12,825 in year one alone, plus a $9,000 front-end charge. Over a 10-year term, a 75% guarantee on a balanced fund requires roughly a 25% decline before the guarantee is worth anything at all. Louise is paying a substantial annual premium for protection that only bites in a severe, sustained downturn and only on one specific date. Compare that with a GIC ladder: fully guaranteed principal, no MER, but no growth and no estate top-up.
Beneficiary designation. A named beneficiary on a segregated fund contract (where permitted by the contract and provincial insurance law) bypasses the estate and probate, and the death guarantee is paid to that beneficiary. That is a real benefit for Louise.
The consumer proposal. A revocable designation is generally not the creditor-protection structure. Protection under provincial insurance legislation for a segregated fund typically requires an irrevocable beneficiary who is a family member - spouse, child, parent or grandchild as defined. Even then, protection is not absolute: transfers made to defeat creditors, and the preferences and reviewable-transaction rules in insolvency legislation, can reach the funds if the transfer occurred when she was insolvent or with intent to defeat creditors. Louise is solvent; the risk is not that her creditors will attack the contract, it is that an irrevocable designation to a beneficiary in a consumer proposal may be attacked by his trustee if the intent looks like sheltering.
3. Is this sale suitable? Set out the recommendation and the disclosure that must happen before any signature.
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The sale can be suitable, but not in the form Tariq has proposed, and not on the reasoning Louise is using.
Her stated need is income starting at 75 and no losses. The proposed contract answers neither directly. The 10-year term matures when she is 78 - after she needs income - and every dollar she withdraws from 75 reduces the guarantee base. The guarantee is therefore weakest exactly when she will be drawing on it. Meanwhile a 2.85% MER plus a 2% front-end load is a heavy drag on a contract whose value to her is mainly the death guarantee and probate avoidance.
Before signature, Tariq must document:
- A written comparison against a GIC ladder, a plain balanced mutual fund, and an annuity, with the fee difference in dollars.
- The exact withdrawal-reduction method and a projection of the guarantee base at 75 and at 78.
- That the maturity guarantee applies only on the maturity date, at 75%, and that there is no guarantee against a loss realised earlier.
- That the death guarantee is the feature most likely to matter to her, and that a revocable beneficiary designation gives probate avoidance but not creditor protection.
- That naming a son in a consumer proposal as irrevocable beneficiary should be reviewed with an insolvency lawyer before it is done - Tariq should not give that legal advice himself.
A defensible structure might split the $450,000: a GIC or short-bond ladder for the income she needs from 75, and a smaller segregated fund position for the estate benefit. That is a recommendation, not a product order, and the file should show she was offered the choice.