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CFP® Newsletter

In the November e-newsletter, I discussed retirement planning. Four questions were asked with respect to retirement issues and products. The questions, with the correct answers, are as follows:

Questions

Please answer the following questions about retirement income products. Answers and rationales to these questions will be provided in the December e-newsletter.

1. A non-registered straight life annuity protects the investor against what type of risk?

  1. The risk of dying too soon
  2. Inflation risk
  3. Longevity risk
  4. b and c

Answer:
c. – Longevity risk

Rationale: The sole reason behind buying a straight life annuity is to provide the investor with an income stream for as long as she or he lives. This eliminates the financial risk of “living too long”, or longevity risk.

2. Which of the following annuities would provide the highest level of annual income? Assume that the same amount of premium was invested at the same time with the same insurance company.

  1. Straight life annuity, male age 50, payable monthly, in advance
  2. Straight life annuity, male age 60, payable annually, in arrears
  3. Straight life annuity, female, age 50, payable monthly, in advance
  4. Straight life annuity, male, age 60, payable monthly, in arrears

Answer:
d. – Straight life annuity, male, age 60, payable in arrears.

Rationale: The older the life insured, the higher the annuity payments. Also, because males do not, on average, live as long as females of the same age, males receive a higher annual annuity payment. Finally, annuities payable in advance versus arrears pay less because the insurance company has to make annuity payments earlier and therefore has less time to earn interest on the premiums.

3. Which factors are used to determine the amount of annuity payments under a term certain annuity?

  1. Interest rates at the time of purchase
  2. The term of the annuity
  3. The frequency of the annuity payments
  4. The life expectancy and gender of the annuitant
  1. ii, iii, iv
  2. i, ii, iii
  3. i, iii
  4. i, iii, iv

Answer:
b. – i, ii, iii

Rationale: The life expectancy and gender of the annuitant is irrelevant in pricing a term certain annuity. The payout is based on the guaranteed term (5 years, 10 years, etc.), interest rates and payment frequency (monthly or yearly).

4. What is true about GMWBs?

  1. The premium is invested in units of a non-segregated fund.
  2. The GWA or LWA varies with the consumer price index (CPI).
  3. The life expectancy of the annuitant (s) is unknown.
  4. The guarantee period under the contract is variable, at the policy owner’s discretion.

Answer:
d. – The guarantee period under the contract is variable, at the policyowner’s discretion.

Rationale: At the discretion of the policy owner, the guaranteed income may continue until the annuitant’s death or until the original investment is repaid (up to 20 years at 5%).

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About the FPE1® and FPE2® examinations

On December 3, 2011, candidates attempted the FPE1 and FPE2 examinations. This is the second time these exams have been offered by the Financial Planning Standards Council® (FPSC), under the new program, as a means of obtaining the CFP® designation.

The FPE1 examination is a four-hour multiple choice exam. The FPE2 examination is a six–hour, mostly written exam consisting of approximately 20% multiple choice questions. For the FPE2 exam you are required to bring your computer, and you are provided with a disc that includes the exam.

How the examinations differ

The content of the FPE1® and FPE2® examinations is largely the same. However, the FPE2® examination is application-oriented and requires you to integrate several topic areas when formulating your answers.

Since FPE1 is all multiple-choice, you must be able to identify and distinguish relevant facts to obtain the correct answers. Students with an eye for details and an overall strong knowledge of the content usually perform very well on multiple-choice exams.

The FPE2® examination is mostly written (as opposed to multiple-choice). Most students have less experience with written exams. After reading a question or case study on the FPE2® exam, it is important for one to determine what is the key information. If, for example, one is given a case study where a married couple in their late 40s has retirement, insurance, tax and investment issues, one must prioritize these concerns and present effective, workable solutions. One must be able to demonstrate to the grader a strong understanding of the issues and provide answers that are appropriate to the number of marks assigned. For example, a 10% question will obviously require that one address more points than on a 2% question.

Concluding Comments

Here’s hoping you have a great holiday season! Best of luck on your endeavours with the Advocis CFP program.

Sincerely,

Ron Foran, CFP, CFA, CLU, FCSI
President, Foran Financial Institute

Ron Foran is the founder of Foran Financial Institute. He has lectured extensively around the world over 24 years on investments and financial planning. Ron has a passion for teaching, training and assisting students to pass exams, and is the primary instructor for Foran securities and investment management seminars. If you want to learn more about Ron or Foran Financial Institute, please go to www.foranfinancial.com.


Note: Advocis does not award the CFP® and Certified Financial Planner® designation. The right to use the marks CFP®, CERTIFIED FINANCIAL PLANNER® and CFP(logo) is granted under licence by FPSC to those persons who have met its educational standards, passed the FPSC's Certified Financial Planner Examination, satisfied a work experience requirement, and agreed to abide by FPSC Code of Ethics.