A guarantee is not the same as account value

What the lesson covers

1. 01

   The client

   Priya puts one hundred thousand dollars into a segregated fund with a seventy-five percent maturity guarantee. So the contract guarantees her seventy-five thousand dollars at maturity. Two years later the market has fallen, and her fund is worth sixty thousand. She needs fifteen thousand for a new roof. She assumes her guarantee simply drops by the same fifteen thousand, to sixty thousand. If her contract uses proportional reduction, that is not what happens.

2. 02

   Two numbers

   A segregated fund carries two different numbers. The market value is what the fund is worth today, and it moves. The guaranteed amount is the floor the contract promises at maturity or on death. A withdrawal comes out of the market value. The contract decides what it does to the guarantee.

3. 03

   The method

   Step one: what share of the fund is she taking out? Fifteen thousand out of sixty thousand is twenty-five percent. Step two: the guarantee shrinks by that same twenty-five percent. Seventy-five thousand, reduced by a quarter, leaves fifty-six thousand two hundred and fifty.

4. 04

   Why it matters

   Look at the gap. She took fifteen thousand in cash, but her guarantee fell by eighteen thousand seven hundred and fifty. When the market value is below the guarantee, proportional reduction takes more guarantee than the dollars withdrawn. When the market is above the guarantee, it takes less. Either way, the percentage drives the math, not the dollar amount.

5. 05

   Exam move

   Here is how the exam asks it. Reset to zero? No. Only a full surrender ends the guarantee. Unchanged? No. A withdrawal always reduces it. Reduced by the cash withdrawn? That is the dollar-for-dollar method, a different rule. Reduced by the same percentage the withdrawal represents of market value. That is the answer.

6. 06

   Takeaway

   Remember it as one line: the new guarantee equals the old guarantee, times one minus the withdrawal divided by the market value. With a real client, the contract sets the method, so read it before you run the numbers.