LLQP Segregated Funds & Annuities · Component 1.3 · 35% of the exam
A client asks why inflation matters when her guaranteed interest option cannot lose money. The need this identifies is:
- ALiquidity risk, since a guaranteed option cannot be redeemed before its term ends
- BMarket risk, since guaranteed rates fall when equity markets decline sharply
- Purchasing power protection, since a guaranteed nominal return can still buy less each year
- DCredit risk, since the guarantee depends on the insurer remaining solvent for the whole term
Correct answer: C) Purchasing power protection, since a guaranteed nominal return can still buy less each year
A contract that protects the number of dollars does nothing for what those dollars buy, which over a long retirement is the larger of the two risks.
Why the other options are wrong
- ALiquidity is a separate concern from the erosion of purchasing power.
- BGuaranteed rates are set at issue and do not fall with equity markets.
- DInsurer solvency is a real but distinct risk from inflation.
Exam tip
Guaranteed protects the dollars, not what they buy.
Common mistake
Telling a client a guaranteed product carries no risk at all.
What this tests
CISRO competency component 1.3 — Assess the client's needs and situation — which is weighted at 35% of the Segregated Funds & Annuities module. Written against the published curriculum.
More from component 1
- The first step before recommending a segregated fund or annuity is to:
- A client's 'time horizon' for an investment is:
- 'Risk tolerance' in an investor profile refers to:
- A client says he wants 'high returns with no risk of losing money'. The agent should:
- Investment objectives are commonly classified as:
- Why is the client's marginal tax rate relevant to a segregated fund recommendation?
Practice the whole Segregated Funds & Annuities module
Timed sets weighted like the exam, and review of every question you miss. Free to start.