LLQP Segregated Funds & Annuities · Component 2.2 · 30% of the exam
A segregated fund's 'proportional reduction' of guarantees on withdrawal means:
- Each withdrawal reduces the guarantee in the same proportion it bears to market value
- BThe guarantee is unaffected by withdrawals as long as they stay within the annual free amount
- CThe guarantee falls by the cash amount withdrawn only, whatever the market value at the time
- DThe guarantee increases after each withdrawal, since fewer units remain to be protected
Correct answer: A) Each withdrawal reduces the guarantee in the same proportion it bears to market value
Proportional reduction is the common method and penalizes withdrawals when the market is down. Some contracts use dollar-for-dollar reduction, which is more favourable.
Why the other options are wrong
- BWithdrawals reduce guarantees.
- CThat is dollar-for-dollar, a different method.
- DWithdrawals never increase guarantees.
Exam tip
Proportional reduction: withdrawing when down cuts the guarantee more than the cash.
Common mistake
Advising withdrawals in a downturn without explaining the guarantee effect.
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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