LLQP Segregated Funds & Annuities · Component 2.1 · 30% of the exam
A client notices that the unit value of her non-registered segregated fund fell on the day the fund allocated its annual income. The agent should explain that:
- Athe fund has lost money and the allocation was made to disguise the decline from unitholders
- the allocation moved value out of the unit price and into the client's hands as taxable income
- Cthe insurer reduced the guarantee at the same time, which is what caused the unit value to fall
- Dunit values never change on an allocation date because allocations are purely a tax entry
Correct answer: B) the allocation moved value out of the unit price and into the client's hands as taxable income
When a segregated fund allocates income and realized gains to unitholders, that value leaves the fund. The unit value drops by the amount allocated, but the client is no worse off because the allocation is credited to the contract and reported for tax.
Why the other options are wrong
- ANothing is being disguised; the drop is arithmetic, not a loss of value to the client.
- CGuarantees are not reduced by an income allocation; they change on withdrawals and resets.
- DAllocations do move value out of the fund, so the unit value does change.
Exam tip
An allocation shifts value from the unit price to the contract; total value is unchanged.
Common mistake
Reading a drop in unit value on an allocation date as an investment loss.
What this tests
CISRO competency component 2.1 — Analyze the available products that meet the client's needs — which is weighted at 30% of the Segregated Funds & Annuities module. Written against the published curriculum.
More from component 2
- A segregated fund's 'guaranteed amount' after a partial withdrawal under proportional reduction is:
- A distinctive estate advantage of a segregated fund over a non-registered mutual fund held jointly with a child is:
- Segregated fund guarantees are most valuable relative to their cost when:
- A segregated fund's annual statement reports:
- Compared with a segregated fund, an exchange-traded fund (ETF) generally offers:
- A segregated fund's 'automatic death benefit reset' feature:
Practice the whole Segregated Funds & Annuities module
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