Many segregated fund contracts include a reset option, which allows the contract owner to lock in investment gains by resetting the guarantee base to the current market value of the fund. A reset has two effects:
- The guarantee base (the amount used to calculate 75% or 100%) is raised to the current market value.
- The maturity date is extended: after a reset, the maturity date moves forward so that there are again at least 10 years remaining on the contract from the reset date. This is because the insurer needs the full minimum term to manage the financial risk of the guarantee.
Example: A contract is issued with $100,000 in deposits and a maturity date 10 years out. After five years, the fund value has grown to $140,000. The owner exercises a reset. The guarantee base is now $140,000 (or 75% or 100% of $140,000 depending on the contract type). The maturity date is reset to 10 years from the reset date.
Exam points:
- Resets lock in gains but extend the contract term -- the owner trades early access for a higher guarantee floor.
- After a reset, if markets subsequently fall, the guarantee protects the locked-in value, not the original deposit amount.
- Most contracts limit the number of times a reset can be exercised per year (commonly once or twice annually), or cap the total number of resets.
- Withdrawals after a reset reduce the (now higher) guarantee base proportionately.
Memory hook: "Reset = raise the floor, push back the door." The floor (the guarantee base) goes up; the door to maturity (the maturity date) moves further away.