LLQP Life Insurance · Component 2.1 · 30% of the exam
A client asks whether the growth inside her exempt whole life policy is taxed each year. The answer is:
- AYes, on accrual each year, since the growth is investment income earned on the client's behalf by the insurer
- BOnly after ten years, when the policy has accumulated enough value for the CRA to treat it as an investment
- No; growth inside an exempt policy is not taxed annually, and tax arises only on a disposition
- DYes, as capital gains each year, since the cash value represents an increase in the value of the client's property
Correct answer: C) No; growth inside an exempt policy is not taxed annually, and tax arises only on a disposition
Exempt status defers tax on internal growth. That deferral, and the tax-free death benefit, are the tax advantages of permanent insurance. Non-exempt policies, by contrast, are taxed on accrual.
Why the other options are wrong
- AAccrual taxation applies to non-exempt policies, not exempt ones.
- BThere is no ten-year rule.
- DPolicy gains are income, not capital gains, and arise only on disposition.
Exam tip
Exempt policy: no annual tax on growth; tax only on disposition. Non-exempt: annual accrual tax.
Common mistake
Telling clients the cash value is taxed every year.
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.