LLQP Ethics & Professional Practice · Component 1.6 · 60% of the exam
A beneficiary asks whether she must report the life insurance death benefit on her tax return. The agent should explain that:
- the death benefit itself is received tax-free, though interest paid on it is taxable
- Bthe benefit is taxable only in cases where the beneficiary is not related to the deceased person
- Cthe benefit is fully taxable as ordinary income in the year that it is received
- Dhalf the benefit is included in income because it is treated as a capital gain
Correct answer: A) the death benefit itself is received tax-free, though interest paid on it is taxable
A life insurance death benefit is received free of income tax. Any interest the insurer adds for the period after the death is taxable, and the beneficiary receives a slip for that amount.
Why the other options are wrong
- BThe relationship to the deceased does not affect the tax treatment.
- CDeath benefits are not included in the recipient's income.
- DNo capital gains treatment applies to a death benefit.
Exam tip
The benefit is tax-free; only the interest added afterward is taxable.
Common mistake
Confusing the tax-free death benefit with the taxable interest paid on it.
What this tests
CISRO competency component 1.6 — Integrate into practice the legal aspects of insurance and annuity contracts — which is weighted at 60% of the Ethics & Professional Practice module. Written against the published curriculum.
More from component 1
- An 'assignee' of a life insurance policy is:
- A corporation as policyowner and beneficiary of a policy on a key employee:
- A 'trustee' named to receive proceeds on behalf of a beneficiary:
- The 'automatic premium loan' (APL) provision:
- A life insurance contract 'matures' when:
- The 'assignment' provision typically states that:
Practice the whole Ethics & Professional Practice module
Timed sets weighted like the exam, and review of every question you miss. Free to start.