LLQP Life Insurance · Component 2.1 · 30% of the exam
A client wants to use life insurance to fund a bequest and asks whether the death benefit paid to the charity is taxable to the charity.
- No; the death benefit is tax-free to the beneficiary, and charities are exempt in any case
- BIt is taxed to the estate before the charity receives the balance, since the deceased owned the policy at the moment of death
- COnly the amount above a threshold is taxable to the charity, with the first portion received free of tax
- DYes, since a charity is a corporation and corporations pay tax on all receipts including insurance proceeds
Correct answer: A) No; the death benefit is tax-free to the beneficiary, and charities are exempt in any case
The proceeds reach the charity intact. If the charity is named as beneficiary, the estate also receives a donation credit for the gift at death.
Why the other options are wrong
- BThe estate is not taxed on proceeds paid directly to a charity; it receives a credit.
- CThere is no threshold.
- DDeath benefits are not taxable to beneficiaries.
Exam tip
Charity as beneficiary: full proceeds to the charity, donation credit on the terminal return.
Common mistake
Assuming a charity must pay tax on insurance proceeds.
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.