LLQP Ethics & Professional Practice · Component 1.4 · 60% of the exam
The 'adjusted cost basis' (ACB) of a life policy is relevant because:
- AIt is irrelevant to the owner, since the insurer calculates and reports any tax without the owner's involvement at any stage
- On a disposition, the gain of proceeds minus ACB is taxable; ACB is roughly premiums less the net cost of insurance
- CIt sets the premium the insurer may charge, since the CRA limits the cost of insurance to the ACB
- DIt is the death benefit payable at death, adjusted for any loans outstanding against the policy
Correct answer: B) On a disposition, the gain of proceeds minus ACB is taxable; ACB is roughly premiums less the net cost of insurance
ACB governs the tax on surrenders and transfers; the net cost of pure insurance reduces it over time.
Why the other options are wrong
- AThe ACB is central to disposition tax.
- CThe premium is set by the insurer.
- DThe death benefit is separate and tax-free.
Exam tip
Policy gain = proceeds − ACB, taxed as income.
Common mistake
Telling a client a surrender is tax-free.
What this tests
CISRO competency component 1.4 — 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
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