LLQP Life Insurance · Component 2.1 · 30% of the exam
A beneficiary receives a death benefit several months after the insured's death, with an additional amount added by the insurer. For tax purposes:
- Aboth the death benefit and the added amount are received entirely free of tax
- Bthe whole payment is included in the beneficiary's income for the year received
- the death benefit is tax-free while the interest added afterward is taxable
- Dthe added amount reduces the tax-free portion of the death benefit proportionately
Correct answer: C) the death benefit is tax-free while the interest added afterward is taxable
The benefit itself is received without tax. Interest for the period between the death and the payment is income, and the beneficiary receives a slip reporting it.
Why the other options are wrong
- AInterest added after the death is taxable in the recipient's hands.
- BThe death benefit itself is not included in income.
- DThe interest is additional income and does not reduce the benefit.
Exam tip
Benefit tax-free, interest taxable; expect a slip for the interest.
Common mistake
Telling a beneficiary the whole payment is free of tax.
What this tests
CISRO competency component 2.1 — Analyze the available products that meet the client's needs — which is weighted at 30% of the Life Insurance module. Written against the published curriculum.
More from component 2
- A client has a need lasting about twenty years and compares a ten-year and a twenty-year term policy. The main point to explain is that:
- A client exercises the conversion privilege on his term policy. The permanent premium will be based on:
- A client notices that a small policy costs proportionately more per unit of coverage than a larger one. The explanation is that:
- A client wants to pay monthly rather than annually. The agent should explain that monthly payment:
- A client asks why dividends from her participating policy are not taxed like interest from a bank. The reason is that a dividend is:
- A universal life policyholder is choosing among the investment options inside her policy. She should understand that:
Practice the whole Life Insurance module
Timed sets weighted like the exam, and review of every question you miss. Free to start.