Browse Analysis of Managed and Structured Products

22.2.2 Structure Of Segregated Funds

Learn about the structure of segregated funds in the context of the Canadian securities industry. Discover the roles of the contract holder, annuitant, and beneficiary, and understand the legal aspects of segregated fund contracts.

Overview

Because of their legal structure, segregated funds do not issue actual units or shares to investors, as this would imply ownership. Instead, an investor is assigned notional units of the contract—a concept that measures a contract holder’s participation and benefits in a fund. This approach also makes it possible to compare the investment performance of segregated funds with those of mutual funds.

Essentially, the contract involves three different parties, described below.

Key Parties in a Segregated Fund Contract

The Contract Holder

The contract holder is the person who buys the segregated fund contract. The contract can be held within a registered plan belonging to the holder, such as an RRSP, RESP, RRIF, or TFSA. In such cases, the contract holder and the annuitant must be the same person. When the contract is held outside a registered plan, the contract holder can be someone other than the annuitant.

The Annuitant

The annuitant is the person whose life is insured by the contract and on whose life the insurance benefits are based. There are restrictions on whose life a contract holder can base a contract, often requiring an insurable interest in the life or health of the annuitant. In general, the annuitant must provide written consent if there is no insurable interest.

The Beneficiary

The beneficiary is the person or persons who will receive the benefits payable under the contract upon the death of the annuitant. A contract may have more than one beneficiary. The contract holder may designate one or more beneficiaries, or may designate their estate as the beneficiary. It is important to note that the beneficiary does not have to be a person—it could, for example, be a charitable organization.

The designation of beneficiary can be:

  • Revocable: Allows the contract holder to alter or revoke the beneficiary’s status.
  • Irrevocable: Does not allow the contract holder to change the rights of a beneficiary without their consent.

Important Concepts

Notional Units

Notional units are used in segregated fund contracts to represent the contract holder’s share of the fund without implying ownership. This notional unit system allows the performance of segregated funds to be compared with mutual funds.

Insurable Interest

You have an insurable interest in the life or health of another person if you derive a financial or other kind of benefit from that person. For example, a person who relies on the income of a spouse has an insurable interest in the spouse.

Frequently Asked Questions (FAQs)

Q: What are segregated funds?

A: Segregated funds are investment products structured as insurance contracts. Investors are assigned notional units instead of actual ownership units.

Q: Who can be a contract holder for a segregated fund?

A: A contract holder can be anyone who buys the segregated fund contract. If the contract is within a registered plan, the contract holder and annuitant must be the same person.

Q: What is the difference between a revocable and an irrevocable beneficiary?

A: A revocable beneficiary can be altered or revoked by the contract holder. An irrevocable beneficiary cannot be changed without the beneficiary’s consent.

Key Takeaways

  • Segregated fund contracts assign notional units rather than actual units or shares.
  • The three main parties in the contract are the contract holder, annuitant, and beneficiary.
  • Designating beneficiaries can be either revocable or irrevocable, with certain legal stipulations.
  • Having an insurable interest is crucial for designating an annuitant without their written consent.

Feel free to explore these concepts in the context of your study material to ensure a comprehensive understanding of segregated funds and their structures.


CSC® Exams Practice Questions

📚✨ CSC Exam Questions ✨📚

Welcome to the Knowledge Checkpoint! You'll find 10 carefully curated CSC exam practice questions designed to reinforce the key concepts covered. These questions will help you gauge your grasp of the material, identify areas that need further review, and ensure you're on the right track towards mastering the content for the Canadian Securities certification exams. Take your time, think critically, and use these quizzes as a tool to enhance your learning journey. 📘✨

Good luck!

## Which of the following describes the correct procedure when purchasing a segregated fund? - [ ] The investor receives actual shares - [x] The investor is assigned notional units - [ ] The investor must sign an agreement with a brokerage - [ ] The investor is not provided any formal acknowledgment > **Explanation:** Segregated funds do not issue actual units or shares to investors to imply ownership, instead, investors receive notional units of the contract. ## In the context of segregated funds, who is the contract holder? - [ ] The financial advisor - [ ] The insurance company - [x] The person who buys the segregated fund contract - [ ] The beneficiary > **Explanation:** The contract holder is a person who purchases the segregated fund contract. ## What must be true about the contract holder and annuitant for a segregated fund held within a registered plan? - [x] They must be the same person - [ ] They must be different persons - [ ] The annuitant must be a minor - [ ] The contract holder must be a financial institution > **Explanation:** When the contract is held within a registered plan, the contract holder and the annuitant must be the same person. ## Who is the annuitant in a segregated fund contract? - [ ] The person who purchases the segregated fund contract - [ ] The financial advisor - [x] The person whose life is insured by the contract - [ ] The beneficiary > **Explanation:** The annuitant is the person whose life is insured by the contract and on whose life the insurance benefits are based. ## According to the general rule, under what condition can a contract holder base a segregated fund contract on the life of another person? - [ ] If the other person is a minor - [ ] If both parties agree verbally - [x] If the contract holder has an insurable interest in the annuitant's life or health - [ ] If the insurance company approves the contract > **Explanation:** The general rule is that the contract holder must have an insurable interest in the life or health of the annuitant at the time the contract is signed. ## Who can be a beneficiary in a segregated fund contract? - [x] A person or organization designated by the contract holder - [ ] Only a family member of the contract holder - [ ] Only the estate of the contract holder - [ ] Only the financial advisor > **Explanation:** The beneficiary can be any person or organization designated by the contract holder, including charitable organizations. ## What is true about a revocable beneficiary designation in a segregated fund contract? - [ ] It cannot be changed once designated - [ ] It requires legal counsel to alter - [x] It can be altered or revoked by the contract holder - [ ] It requires the consent of the annuitant > **Explanation:** A revocable designation allows the contract holder to alter or revoke the beneficiary’s status. ## What is true about an irrevocable beneficiary designation in a segregated fund contract? - [x] It cannot be changed without the beneficiary’s consent - [ ] It can be changed anytime by the contract holder - [ ] It must be approved by a regulatory authority - [ ] It requires annual renewal > **Explanation:** An irrevocable designation does not allow the contract holder to change the rights of the beneficiary without the beneficiary’s consent. ## What happens to the benefits of a segregated fund contract upon the death of the annuitant? - [ ] They revert to the insurance company - [x] They are payable to the designated beneficiary - [ ] They are forfeited - [ ] They are reinvested in the fund automatically > **Explanation:** The beneficiary (or beneficiaries) will receive the benefits payable upon the death of the annuitant. ## Which of the following best describes an insurable interest concerning segregated funds? - [x] A financial or other benefit derived from another person's life or health - [ ] A mandatory government requirement - [ ] An interest rate set by financial market conditions - [ ] A type of insurance premium > **Explanation:** An insurable interest exists if a person benefits financially or in another way from the existence or health of another person, such as a spouse dependent on the other’s income.

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Sunday, July 21, 2024