LLQP Life Insurance · Component 1.2 · 35% of the exam
A client wants to cash in an old permanent policy with a large cash value and a low adjusted cost basis. The tax consequence the agent must explain is:
- AA deduction equal to the premiums paid over the life of the policy, which offsets the cash received on surrender
- A policy gain equal to the cash surrender value minus the ACB, fully included in income in the year of surrender
- CA capital gain taxed at half the usual rate, since the policy's growth is treated as an investment return
- DNone, since the cash value is a return of the client's own premiums and is received tax-free
Correct answer: B) A policy gain equal to the cash surrender value minus the ACB, fully included in income in the year of surrender
Policy gains are income, not capital gains. After many years the ACB has declined (as the net cost of pure insurance is deducted), so most of the cash value can be taxable. Alternatives — partial surrender, collateral loan, reduced paid-up — may be better.
Why the other options are wrong
- AThere is no deduction on surrender.
- CPolicy gains are fully included as income, not as capital gains.
- DCash value above the ACB is taxable.
Exam tip
Old policy + big cash value + low ACB = large policy gain on surrender. Model the alternatives.
Common mistake
Advising surrender without a tax calculation.
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.