LLQP Segregated Funds & Annuities · Component 2.4 · 30% of the exam
A long-serving employee leaves a defined benefit plan and is offered a commuted value transfer. The agent should explain that taking the transfer means:
- Athe pension promise continues unchanged while the money also sits in a locked-in account
- the employee gives up the guaranteed pension and takes on the investment and longevity risk
- Cthe employer continues to guarantee a monthly amount from the plan's normal retirement date
- Dthe transferred amount may be withdrawn in cash at any time once it leaves the pension plan
Correct answer: B) the employee gives up the guaranteed pension and takes on the investment and longevity risk
A commuted value settles the plan's obligation in a single amount, usually transferred to a locked-in account with a portion taxable if it exceeds the transfer limit. The member then bears the risks the plan sponsor previously carried.
Why the other options are wrong
- AThe pension promise ends when the commuted value is paid out of the plan.
- CNo monthly amount remains once the member has taken the commuted value.
- DThe transferred amount is locked in and cannot be taken in cash.
Exam tip
Commuted value equals trading a guaranteed pension for investment and longevity risk.
Common mistake
Presenting a commuted value as extra money rather than as a transfer of risk.
What this tests
CISRO competency component 2.4 — 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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