LLQP Life Insurance · Component 1.3 · 35% of the exam
A client owns shares in a private company with a large accrued capital gain. How can life insurance address the tax triggered at death?
- The death benefit provides liquidity to pay the tax on the deemed disposition, so the shares need not be sold
- BIt cannot; the tax must be paid from the estate's other assets, since insurance proceeds cannot be applied to tax
- CLife insurance eliminates the capital gain, since the CRA waives the deemed disposition on insured shareholders
- DThe shares are exempt from tax at death, since private company shares pass to heirs at their original cost
Correct answer: A) The death benefit provides liquidity to pay the tax on the deemed disposition, so the shares need not be sold
The curriculum lists 'benefits of using life insurance proceeds to defray the tax on capital gains that may be triggered at death'. Insurance does not remove the tax; it funds it, preserving the asset for the heirs.
Why the other options are wrong
- BLife insurance is precisely the tool used to fund tax at death.
- CInsurance does not eliminate the capital gain or the tax; it pays for it.
- DPrivate company shares are not exempt from the deemed disposition at death.
Exam tip
Insurance funds the tax on deemed dispositions; it never removes it. Watch for answers that claim a tax is 'eliminated'.
Common mistake
Believing life insurance makes the estate's tax liability disappear.
What this tests
CISRO competency component 1.3 — 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.