LLQP Ethics & Professional Practice · Component 1.4 · 60% of the exam
The 'exempt policy' rules under the Income Tax Act mean that:
- A policy meeting the exempt test accrues growth free of annual tax; a non-exempt policy is taxed annually
- BPremiums on an exempt policy are deductible from the owner's income, in the same way as RRSP contributions
- CDeath benefits under an exempt policy are taxable to the beneficiary, since the growth was never taxed
- DAll life policies are tax-free in every respect, so the exempt test has no practical effect on planning
Correct answer: A) A policy meeting the exempt test accrues growth free of annual tax; a non-exempt policy is taxed annually
Exempt status is a major advantage of permanent insurance; over-funding can breach it.
Why the other options are wrong
- BPersonal premiums are not deductible.
- CDeath benefits are tax-free.
- DOnly exempt policies grow tax-sheltered.
Exam tip
Exempt policy = tax-sheltered growth; watch over-funding.
Common mistake
Over-depositing into a UL policy and losing exempt status.
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
Timed sets weighted like the exam, and review of every question you miss. Free to start.