LLQP Life Insurance · Component 1.2 · 35% of the exam
A client wants to access the cash value of his whole life policy. Which method generally does NOT create a taxable disposition at the time?
- AA policy loan in excess of the adjusted cost basis, since the insurer treats the loan as a debt rather than a payout
- BA partial surrender of part of the cash value, since only the portion withdrawn is affected
- CA full surrender of the policy for its cash value, since the contract simply ends
- Using the policy as collateral for a loan from a lender
Correct answer: D) Using the policy as collateral for a loan from a lender
Collateral assignment of the policy to a third-party lender is not a disposition; the client borrows from the bank against the policy. Surrenders and policy loans above the ACB are dispositions that can produce a taxable policy gain. This distinction drives leveraged insurance strategies and is part of assessing existing policies.
Why the other options are wrong
- AA policy loan is a disposition to the extent it exceeds the ACB.
- BA partial surrender is also a disposition, with a proportionate gain.
- CA full surrender is the clearest disposition; the gain above ACB is taxable.
Exam tip
Borrowing from a third-party lender against the policy is not a disposition; borrowing from the policy is. That distinction is the basis of leveraged strategies.
Common mistake
Treating a policy loan and a collateral bank loan as tax-equivalent.
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.