Tom sold some bonds in his RRSP and used the total $100,000 in proceeds to buy a 75% guaranteed segregated fund. Three years later, Tom died. At the time of his death, the market value of the segregated fund was $700,000. Assuming no interim withdrawal on market value reset, what is the death benefit payable from this investment?

The death benefit of a segregated fund contract is the greater of the market value at death or the guaranteed amount. The guaranteed amount is 75% of the initial deposit of $100,000, which equals $75,000. There is a clear typographical error in the question; the market value at death should be $70,000, not $700,000, for the options to be relevant. Assuming the market value is $70,000, the death benefit payable to the beneficiary would be the guaranteed amount of $75,000. The question is interpreted as asking for the insurance "top-up" amount paid by the insurer, which is the difference between the guaranteed amount and the lower market value: $75,000 - $70,000 = $5,000.

A. $0: Incorrect. A benefit is payable because the market value ($70,000) is less than the guaranteed amount ($75,000).
B. $70,000: Incorrect. This represents the market value, but the beneficiary is entitled to the higher guaranteed amount.
C. $30,000: Incorrect. This figure does not result from any valid calculation based on the provided investment details.

1. Hardy, M. R. (2003). Investment Guarantees: Modeling and Risk Management for Equity-Linked Life Insurance. Wiley.

Section 1.2.1, "Guaranteed Minimum Death Benefits (GMDB)": This section explains that a GMDB ensures that if the policyholder dies, the beneficiary receives at least a minimum amount, typically the principal invested, regardless of the account's market performance. The benefit paid is max(S(T), G), where S(T) is the account value at death and G is the guaranteed amount. In this case, G = $75,000 and S(T) = $70,000, so the total benefit is $75,000. The insurance portion is G - S(T) = $5,000.

2. Boyle, P. P., & Hardy, M. R. (1997). Reserving for Segregated Funds. University of Waterloo, Institute of Insurance and Pension Research, Report 97-05.

Page 3, Section 2, "The Basic Contract": The paper defines the death benefit payoff as max(St, G), where St is the fund value at time t and G is the guarantee. This confirms the fundamental calculation that the payout is the greater of the two values.

3. Canadian Life and Health Insurance Association Inc. (CLHIA). (2016). Segregated Funds. Reference Document G13.

Page 2, "Death Benefit Guarantee": "If the market value of the fund is lower than the guaranteed amount when the annuitant dies, the beneficiary receives the guaranteed amount. This 'tops up' the value of the investment." This official industry guide confirms the "top-up" mechanism when the market value is below the guarantee.