LLQP Life Insurance · Component 2.1 · 30% of the exam
A client asks why dividends from her participating policy are not taxed like interest from a bank. The reason is that a dividend is:
- Aa share of the insurer's corporate profits, taxed under the rules for share dividends
- Btaxed at a preferential rate applied to all life insurance policy distributions
- a return of premium the policyholder overpaid, rather than investment income
- Dexempt income created by a specific provision of the tax legislation
Correct answer: C) a return of premium the policyholder overpaid, rather than investment income
Participating premiums are set conservatively, and a dividend returns the excess when experience is favourable. Because it is a return of the policyholder's own money it is not income, although interest earned on dividends left on deposit is taxable.
Why the other options are wrong
- AA policy dividend is not a shareholder dividend from corporate profits.
- BNo preferential rate applies to policy distributions generally.
- DThe treatment follows from its nature, not a special exemption.
Exam tip
A policy dividend returns an overpayment; interest earned on it is taxable.
Common mistake
Explaining a policy dividend as an investment return.
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 universal life policyholder is choosing among the investment options inside her policy. She should understand that:
- A client takes a partial withdrawal from the fund of his universal life policy. The tax consequence is that:
Practice the whole Life Insurance module
Timed sets weighted like the exam, and review of every question you miss. Free to start.