BFIN 3020 CH 22

segregated funds

type of pooled investment, except they are considered an insurance product. The offer maturity protection, death benefits, and creditor protection

individual variable insurance contract

a segregated fund contract between a contract holder and an insurance company

Canadian Life and Health Insurance Association

oversees main regulatory requirements of segregated fund (provincial)

OFSI

ensures federally regulated insurance companies are adequately capitalized.

Assuris

provider of protection against the loss of policy benefits in the event of insolvency of a member company. Only covers maturity guarantees and death benefits.

What is is the maximum compensation Assuris gives for segregated funds?

60,000 or 85% of promised guaranteed amounts (whichever is higher)

notional units

a unit that exists in theory and is representative of something else. These are assigned to investors instead of actual units/shares in a segregated fund.

if the segregated fund is held within a registered plan, the contract holder and __________ must be the same person

annuitant (life Insured)

annuitant

the person whose life the segregated contract’s benefits are contingent upon

insurable interest

a person is considered to have an insurable interest in the life of another if they would suffer a financial loss or disadvantage upon that person's death.

revocable beneficiary

allows the contract holder to alter the beneficiary’s status

irrevocable beneficiary

does not allow the contract holder to change the rihgts of a beneficiary without the beneficiary’s consent

maturity guarantee in segregated funds

75% of the amount invested over a contract of at least 10 years or the death of the annuitant.

age restrictions of segregated funds (enhanced guarantee)

the annuitant must be no older than 80 when the policy is issued, or, contract hold could receive a reduced level of protection when the annuitant reaches a certain age.

reset dates

(renewal) allows the segregated fund contract hold to lock in the current market value of the fund and set a new maturity date 10 years after the reset date.

what is the amount of the death benefit for segregated funds?

the difference between the guaranteed amount and the net asset value of the fund at death.

how does the death benefit work depending on the market value at death?

if the market value is lower than the guaranteed amount, the death benefit is the amount that makes up the shortcoming in the market value to the guaranteed amount. Conversely, if the market value exceeds the guaranteed amount, the death benefit equals the market value. (if the market value is higher, death benefit portion is 0)

how does a segregated fund have creditor protection?

the funds assets are owned by the insurance company.

what type of client could benefit from the creditor protection the most?

business owners, professionals, and other clients with concerns over their personal liability. they must make the purchase in good faith

segregated funds can allow you to avoid _____, because they are not technically part of the deceased person’s _______

probate, estate.

segregated fund MER is ________ than that of mutual funds

higher

when is a segregated fund safe from creditors in the event of bankruptcy?

if theyve had the contract since before they were insolvent.

allocation

the administrative process where income generated by a segregated fund is flowed through to the contract holder.

after an allocation of income, how is the NAVPS of a segregated fund affected?

it does not affect NAVPS

how do capital gains/losses in a segregated fund differ from mutual funds?

Both capital gains and losses can be passed to the contract holder. In mutual funds, capital losses are not flowed through, only gains.

what is the main disclosure document for segregated funds?

information folder

LSVCC Labour sponsored venture capital corporation

managed investment funds sponsored by labour organizations to provide capital for small to medium-sized and emerging companies.

what are the advantages of LSVCC

the federal tax credits (sometimes provincial). 15% credit on annual investment, some provinces give up to an additional 15.5%. The federal credit is based on a maximum of $5000.

risk profile of LSVCCs

high risk, speculative investment.

what is the minimum holding period for LSVCC

8 years, otherwise tax credits need to be paid (recapture)

does LSVCC or equity fund have higher costs?

LSVCC

closed end fund

pooled investment funds that initially raise capital by selling a limited number of shares to investors. Traded on stock exchange

management fee charged by a closed end fund is _____ than a mutual fund

lower

most closed end funds trade at a

discount to their net asset value (NAV)

interval funds/closed end discretionary funds

have the flexibility to buy back their outstanding shares

closed end fund advantages

diversification, can short sell, no need for liquid asset reserve, distributions are not reinvested (they go directly to holder)

disadvantages of closed end funds

trade at discount, less liquid, no reinvestment of distributions.

income trust

holds investments in the operating assets of a company. income from these operating assets flows through to the trust and then through to the unitholders.

2 categories of income trust

REIT and Business trusts

business trust

purchases the assets of an underlying company.

if interest rates rise, REITs trading values

fall

leveraged buyout

acquisition of companies financed with equity and debt. Structured as limited partnerships.

turnaround investments

provide financing to underperforming industries.

mezzanine financing

when a company finances by floating high yielding unsecured preferred equity or subordinate loans/ risk of default is super high.