LLQP Life Insurance · Component 1.2 · 35% of the exam
A client is considering replacing an older permanent policy with a new one. Which tax consideration should the agent raise?
- AThe new policy's premiums are deductible, since replacement policies qualify for the deduction the old one did not
- Surrendering the old policy is a disposition that may trigger a taxable gain, and the new policy restarts contestability
- CThe old policy's ACB transfers to the new one, so the client's tax position is unchanged by the replacement
- DNone, since replacement is tax-neutral as long as the new policy is issued within the same tax year
Correct answer: B) Surrendering the old policy is a disposition that may trigger a taxable gain, and the new policy restarts contestability
Replacement means surrender of the old contract, with any gain over its ACB taxed as income, plus loss of any grandfathered status and the restart of contestability and suicide periods. These are among the reasons replacement rules require a written disclosure.
Why the other options are wrong
- AThe new policy's premiums are not deductible.
- CThe ACB does not carry over; the new policy starts its own.
- DReplacement is not tax-neutral; the surrender can trigger a policy gain.
Exam tip
Before any replacement, quantify the policy gain on surrender and note the restart of contestability and suicide periods.
Common mistake
Replacing an old permanent policy without checking the tax on surrender.
What this tests
CISRO competency component 1.2 — Assess the client's needs and situation — which is weighted at 35% of the Life Insurance module. Written against the published curriculum.
More from component 1
- A client's existing policies were all sold by another agent who has left the business. The reviewing agent should:
- A client supports an adult child with a permanent disability who will never be self-sufficient. In the needs analysis this is:
- A self-employed client's income fluctuates widely year to year. When determining the income to replace, the agent should:
- A 58-year-old client plans to retire at 65 and has a pension that will pay a survivor benefit. How does time to retirement affect the life insurance need?
- Which of the following is a capital expense arising at death, rather than an ongoing income need?
- A client is the sole income earner in a household with a stay-at-home spouse and two young children. The greatest risk that life insurance on the client addresses is:
Practice the whole Life Insurance module
Timed sets weighted like the exam, and review of every question you miss. Free to start.