Segregated Fund Maturity & Death Benefit Guarantees: LLQP Notes

The guarantees are the whole reason segregated funds exist as a separate product. Strip them away and you have an expensive mutual fund. The LLQP exam tests guarantees relentlessly — not the concept, which is easy, but the exact conditions under which they pay.

The maturity guarantee

The maturity guarantee promises that if the contract is held to its maturity date, the contract holder receives at least a stated percentage of deposits — typically 75% or 100% — even if the market value of the fund is lower. The maturity date is usually set 10 to 15 years from the deposit date (some contracts use a single contract maturity date; others track each deposit separately).

If the market value is higher than the guaranteed value at maturity, the holder keeps the market value. The guarantee is a floor, not a cap. When the market value is below the floor, the insurer pays the difference — sometimes called a top-up payment.

That long horizon is the point: guarantees reward investors who stay invested through a full market cycle and are irrelevant to money needed in three years.

The death benefit guarantee

The death benefit guarantee pays when the annuitant dies. The beneficiary receives the greater of:

1. The market value of the contract, or
2. The guaranteed death benefit — again typically 75% or 100% of deposits, adjusted for withdrawals.

Because the money flows to a named beneficiary, it bypasses the estate entirely — no probate, and payment within weeks rather than months.

Contracts are commonly described by their two numbers: a "75/75" contract guarantees 75% at maturity and 75% at death; a "100/100" contract guarantees 100% for both. Higher guarantee levels cost more — the extra protection is priced into the MER.

How the guaranteed value is actually calculated

The guarantee applies to deposits, not to market value and not to deposits-plus-growth. If a client deposits $80,000 with a 100% death guarantee and the fund later falls to $61,000, the death benefit is $80,000. If the fund grows to $95,000, the death benefit is $95,000 — the guarantee simply never subtracts from gains.

Growth above the guaranteed amount is only protected if the holder locks it in with a reset feature. Until then, a rising market does not raise the floor.

What reduces the guarantees

Withdrawals reduce the guarantees. The reduction is generally proportional: if you withdraw 20% of the contract's market value, the guaranteed values drop by roughly 20% as well. This is one of the most-tested mechanics on the module, because candidates assume a withdrawal only reduces the guarantee dollar-for-dollar by the amount taken out.

Other events that matter:

• Early surrender: the guarantee does not apply. The holder receives market value, minus any deferred sales charges. A guarantee is worthless to a client who exits at year four.
• Death of the owner who is not the annuitant: the contract does not pay the death benefit — ownership passes under the successor owner provisions or the estate, because the death benefit keys off the annuitant's life.
• Maturity date reached with no action: the contract matures and pays the greater of market or guaranteed value.

Who's who: owner, annuitant, beneficiary

• Contract holder (owner): deposits the money, controls the contract, can withdraw, switch funds, and name the other parties.
• Annuitant: the measuring life. The death benefit is triggered by the annuitant's death, and maturity dates are often capped at a maximum annuitant age.
• Beneficiary: receives the death benefit. A successor annuitant can be named so the contract continues if the annuitant dies before the owner wants it paid out.

Exam questions deliberately separate these roles — for example, a mother owns the contract, her son is the annuitant, and her daughter is the beneficiary. Ask yourself whose death triggers what before you touch the numbers.

Exam traps

• The guarantee applies at maturity or death only — never on surrender.
• Guarantee percentages apply to deposits, adjusted for withdrawals.
• Withdrawals reduce guarantees proportionally, not dollar-for-dollar.
• The annuitant's death pays the death benefit; the owner's death does not (unless they are the same person).
• Guarantees cost money: 100/100 contracts carry higher insurance fees than 75/75.

Next, make sure you understand how resets raise these guaranteed values, and review the big picture in the segregated funds pillar.