LLQP Ethics & Professional Practice · Component 1.6 · 60% of the exam
The tax treatment of a life insurance death benefit paid to a named beneficiary is:
- ATaxable at 50%, since a death benefit is treated in the same way as a capital gain on the policy
- BSubject to probate tax, since the proceeds form part of the deceased's estate for provincial fee purposes
- CTaxable as income to the beneficiary, since the growth inside the policy was never taxed
- Received tax-free; only the statutory interest from death to payment is taxable to the recipient
Correct answer: D) Received tax-free; only the statutory interest from death to payment is taxable to the recipient
Tax-free death benefits are a foundation of insurance planning; the interest component is the exception.
Why the other options are wrong
- AThere is no half-inclusion of death benefits in income.
- BNamed beneficiaries avoid probate.
- CDeath benefits are not taxable as income.
Exam tip
Death benefit tax-free; interest taxable.
Common mistake
Telling a beneficiary the whole payment is taxable.
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.