LLQP Life Insurance · Component 2.1 · 30% of the exam
A client takes a partial withdrawal from the fund of his universal life policy. The tax consequence is that:
- a proportionate part of the policy gain is included in his income for the year
- Bno tax arises until the policy is surrendered or the insured person dies
- Cthe withdrawal is taxed as a capital gain, so only half is included in income
- Dthe entire amount withdrawn is received free of tax as a return of deposits
Correct answer: A) a proportionate part of the policy gain is included in his income for the year
A withdrawal is a partial disposition, and a share of the policy's gain above the adjusted cost basis becomes income. Withdrawals also reduce the fund and may affect the policy's exempt status.
Why the other options are wrong
- BA partial withdrawal is itself a partial disposition.
- CPolicy gains are ordinary income rather than capital gains.
- DOnly the portion representing cost basis comes out untaxed.
Exam tip
A universal life withdrawal is a partial disposition with an income inclusion.
Common mistake
Describing a withdrawal as simply taking back the client's own deposits.
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.