LLQP Segregated Funds & Annuities · Component 2.2 · 30% of the exam
A forty-year-old client with a twenty-five-year horizon asks whether to pay for the highest guarantee level available. The agent should explain that:
- Aguarantee levels cannot be chosen by the client and are assigned by the insurer at issue
- Bthe guarantee level has no effect on the fee, so the highest one should be taken by default
- Cthe highest level is always the right choice because guarantees are the point of the product
- over a long horizon the guarantee is less likely to pay, so the extra fee may not be worth it
Correct answer: D) over a long horizon the guarantee is less likely to pay, so the extra fee may not be worth it
The longer the money stays invested, the less likely the market value will sit below the guaranteed amount when the guarantee is tested. A long-horizon client is paying a certain fee for an uncertain and increasingly unlikely benefit.
Why the other options are wrong
- AGuarantee levels are elected by the contract holder from the options the insurer offers.
- BA higher guarantee carries a higher insurance fee inside the management expense ratio.
- CThe guarantee has to earn its cost; more is not automatically better for every client.
Exam tip
Match the guarantee level to the horizon; long horizons weaken the case for the highest level.
Common mistake
Recommending the maximum guarantee without weighing the fee against the time horizon.
What this tests
CISRO competency component 2.2 — 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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