LLQP Life Insurance · Component 2.1 · 30% of the exam
A client surrenders a permanent policy for its cash value. The policy gain to be included in income is:
- Athe total premiums paid over the life of the contract, less any dividends received
- Bthe entire cash surrender value received from the insurer on the surrender
- the amount by which the proceeds exceed the policy's adjusted cost basis
- Done half of the cash surrender value, as with the disposition of capital property
Correct answer: C) the amount by which the proceeds exceed the policy's adjusted cost basis
The adjusted cost basis is broadly premiums paid less the net cost of pure insurance and certain other adjustments. It declines over time, so a long-held policy can produce a larger gain than the client expects.
Why the other options are wrong
- APremiums paid are not themselves the amount included in income.
- BThe cost basis is recovered before any gain arises.
- DA policy gain is ordinary income, not a capital gain.
Exam tip
Policy gain equals proceeds minus adjusted cost basis, taxed as ordinary income.
Common mistake
Assuming a surrender produces a capital gain or no tax at all.
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.