Segregated Funds and Annuities
This module tests individual variable insurance contracts (segregated funds) and annuities. It covers guarantees, beneficiary and creditor protection, disclosure, fees, suitability, annuity payout options, and taxation. The exam may also test how a seg fund differs from a mutual fund.
Segregated fund guarantees and structure
A segregated fund is an insurance contract held in the insurer's separate account. It offers death and maturity guarantees, typically 75% or 100% of deposits less withdrawals, over a 10-year maturity date. Resets can lock in a higher guaranteed amount. A named beneficiary generally receives proceeds outside the estate, and creditor protection may apply if the beneficiary is a qualifying family member, depending on provincial law. The contract is not a mutual fund and is not CDIC-insured.
Disclosure, fees, and suitability
The insurer must provide an Information Folder and contract; the advisor must know the client and the product. Fees include management, insurance, and sometimes surrender charges, which reduce net returns. Suitability depends on time horizon, risk tolerance, liquidity needs, and the value of the guarantee. A seg fund guarantee applies only at death or maturity, not on demand.
Annuities
An annuity converts capital into income. Non-registered accumulation annuities generally have accrual taxation; registered contracts are tax-deferred. Payout annuities can be term-certain, life, joint-and-last-survivor, or indexed. Prescribed annuities spread tax evenly, while registered annuity payments are fully taxable. Guaranteed minimum withdrawal and income benefits add living benefits but with fees and conditions.
Worked example
A client deposits $100,000 in a seg fund with a 100% 10-year maturity guarantee and a reset at year five. At reset the value is $130,000; at maturity it is $90,000. The client receives $130,000 because the reset raised the guaranteed amount. Without the reset, the guarantee would be $100,000. If the contract had a 75% guarantee, the floor would be $75,000, or 75% of the reset value if applicable.
Traps that cost marks
Guarantees do not protect against loss on early redemption. Fees and withdrawals reduce the guarantee base. Creditor protection is not automatic in every province. A beneficiary designation can avoid probate but must be valid. Annuity taxation differs between prescribed, non-registered, and registered contracts. Seg funds are insurance contracts, not bank deposits.
Key distinctions
A mutual fund offers no death or maturity guarantee and is governed primarily by securities law; a seg fund is an insurance contract with guarantees and estate features, and it requires a life insurance licence to sell.