LLQP Segregated Funds & Annuities · Component 2.3 · 30% of the exam
The main disadvantage of a life annuity is:
- AIt pays too much income, so the client's estate is left with nothing to pass on
- BIt is taxed twice, once on the premium when the contract is bought and again on each payment when it is received
- Irrevocability: capital is given up, income is fixed, there is no liquidity, and early death forfeits capital
- DIt has high management expense ratios, which erode the income over a long retirement
Correct answer: C) Irrevocability: capital is given up, income is fixed, there is no liquidity, and early death forfeits capital
The trade-off for guaranteed lifetime income is loss of control. Suitable clients value certainty over flexibility.
Why the other options are wrong
- AThe income level is a benefit, not a disadvantage.
- BLife annuity income is not taxed twice.
- DAnnuities have no MER.
Exam tip
Annuity downside: irrevocable, fixed, no liquidity, inflation risk.
Common mistake
Presenting annuities without discussing irrevocability.
What this tests
CISRO competency component 2.3 — 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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