I write this e-newsletter amid news of a Euro debt crisis, gold up to $1,800 an ounce, and general panic on the stock market. People are understandably nervous. They are looking to add stability to their investment portfolio. But where do they find stability in these troubled economic times?

Let’s look at the Individual Variable Insurance Contract (IVIC). Many refer to this product as a segregated fund. Module 9, Fundamentals of Insurance Investment discusses this product in detail.

Here are some contract highlights:

1. It offers a variety of different investments—stocks, bonds, t-bills, etc.
2. It offers a minimum 75% guarantee of gross premiums paid, less withdrawals at death or maturity.
3. Many IVICs offer a reset feature. It allows the policy owner to re-establish the principal guarantees at the current fair market value (FMV) of the assets.
4. It may offer creditor protection.
5. It can bypass probate.

Please answer the following LLQP multiple choice IVIC questions. The answers, rationales and reference guides are at the end of the e-newsletter.

1. Marilyn, age 60, recently received a $400,000 inheritance and wants to invest it. She wants to grow the investment and pass the investment along, intact, to her favourite granddaughter, Penelope. Which product below would you recommend, and why?

1. Segregated funds (IVIC), because they have a minimum guarantee and can bypass probate
2. Segregated funds (IVIC), because they have creditor protection
3. Mutual funds, because they offer lower MER’s than segregated funds (IVIC).
4. Mutual funds, because, unlike segregated funds (IVIC), they are sold by prospectus.

2. Lady Gaga has $24,000 invested in an IVIC with a statutory minimum guarantee. If she withdraws $4,000 to buy a new pair of shoes, what is true about her guarantee?

1. She will receive $15,000 when surrendered.
2. Her heirs will receive $18,000.
3. Her beneficiaries will receive $24,000.
4. She will receive $15,000 at maturity.

3. Assume you own 100 units of an IVIC, and that each unit has an adjusted cost base (ACB) of $6.00 and a fair market value (FMV) of $9.00. If 30 units are surrendered, what is the ACB of the remaining units?

1. $420
2. $525
3. $630
4. $900

If you had trouble finding the correct answers to the above questions, please review Module 9 once more.

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Answers

1. – a. Segregated funds, because they have a minimum guarantee and can bypass probate.

Rationale: Marilyn’s goal is to pass her inheritance intact to her granddaughter. She may buy an IVIC with a 100% guarantee of gross premiums paid at her death. By naming her granddaughter as beneficiary, it will pass outside her will and be free of any probate fees.

Reference: Module 9 Fundamentals of Insurance Investments.

2. – d. She will receive $15,000 at maturity

Rationale: The statutory minimum guarantee is 75%, therefore $24,000 x 75% = $18,000. However, Lady Gaga withdrew $4,000 from the contract. Her guarantee would therefore drop to $15,000 ($18,000 x $4,000)/ $ $24,000 = $3,000). Her guarantee of $18,000 will be reduced by $3,000 to $15,000. However, the guarantee is only available at death or maturity.

Reference: Module 9, Fundamentals of Insurance Investments

3. – a. $420.00

Rationale: 100 units and 30 units are sold leaving 70 units.
70 units x $6.00 ACB = $420.

Reference: Module 9, Fundamentals of Insurance Investments

Best of luck on your exams!

Yours sincerely,