LLQP Life Insurance · Component 2.1 · 30% of the exam
A business owner asks why her corporation should own a policy used for a share redemption buy-sell rather than the shareholders personally. A key reason is:
- The corporation pays with lower-taxed dollars, one policy per shareholder suffices, and the CDA applies
- BPersonal ownership is illegal for buy-sell funding, since the Income Tax Act requires the corporation to hold the policies on its shareholders
- CCorporate policies have no premium, since the insurer recovers its cost from the corporation's other business
- DCorporations are not underwritten, so the shareholders' health does not affect whether the policies are issued
Correct answer: A) The corporation pays with lower-taxed dollars, one policy per shareholder suffices, and the CDA applies
Corporate ownership simplifies administration (one policy per owner), uses corporate cash flow, and takes advantage of the CDA. The trade-offs — corporate control of the policy, complications on sale of the business — must be weighed.
Why the other options are wrong
- BPersonal ownership through cross-purchase is entirely legal.
- CCorporate policies have premiums like any other.
- DThe insured lives are underwritten regardless of owner.
Exam tip
Corporate ownership: fewer policies, corporate dollars, CDA. Personal ownership: simpler on exit, higher cost base for survivors.
Common mistake
Choosing the structure without tax advice on the shareholders' cost base.
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.