LLQP Segregated Funds & Annuities · Component 2.2 · 30% of the exam
The insurance fee component of a segregated fund MER pays for:
- AFund management only, since the insurer's guarantee is funded from its general account rather than from the fund
- BAgent commissions only, since the guarantee is a marketing feature rather than a cost
- The maturity and death guarantees and any GMWB feature, rising with guarantee level and volatility
- DGovernment taxes on the fund, which the insurer passes through to the contract holder
Correct answer: C) The maturity and death guarantees and any GMWB feature, rising with guarantee level and volatility
The insurance fee is the price of the guarantee. Equity funds with 100/100 guarantees carry the highest insurance fees.
Why the other options are wrong
- AManagement is a separate component of the MER.
- BCommissions are paid from different sources.
- DTaxes are a separate MER component from the insurance fee.
Exam tip
Insurance fee ∝ guarantee level × fund volatility.
Common mistake
Not explaining why an equity 100/100 contract costs more than a bond 75/75.
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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