LLQP Life Insurance · Component 1.1 · 35% of the exam
A client owns a cottage that has appreciated substantially. Why does this matter in a life insurance needs analysis?
- AThe cottage must be sold to buy insurance, since the premium on a large policy exceeds what the client can pay from income
- The capital gain is deemed realized at death and the tax may force a sale unless liquidity is provided
- CThe cottage is exempt from all tax, so it passes to the heirs without any liability on the final return
- DCottages cannot be left to heirs under provincial law, so the estate must sell the property and distribute the cash
Correct answer: B) The capital gain is deemed realized at death and the tax may force a sale unless liquidity is provided
Unless the cottage qualifies as the principal residence, its accrued gain is taxed on the deemed disposition at death (a spousal rollover can defer this to the second death). Heirs who want to keep the property need liquidity to pay the tax, which life insurance can provide.
Why the other options are wrong
- AThere is no requirement to sell the cottage; the insurance exists so it need not be sold.
- COnly a principal residence is exempt; a second property's gain is taxable at death.
- DCottages can be left to heirs; the problem is paying the tax that comes with the transfer.
Exam tip
Any appreciated non-principal-residence property is a liquidity need at death (or at the second death if rolled to a spouse).
Common mistake
Forgetting that the deemed disposition at death applies to the cottage even if no one sells it.
What this tests
CISRO competency component 1.1 — 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.