LLQP Life Insurance · Component 1.3 · 35% of the exam
A corporation owns and is beneficiary of a policy on its sole shareholder. A key advantage is that the death benefit:
- can generally be distributed to the estate as a tax-free capital dividend, net of the policy's cost basis
- Bis exempt from the corporation's own financial statements and its reported assets
- Cis received by the corporation as fully taxable income in the year of the death
- Dmust be used only to repay the corporation's outstanding commercial debts
Correct answer: A) can generally be distributed to the estate as a tax-free capital dividend, net of the policy's cost basis
The benefit is received free of tax by the corporation, and the amount exceeding the policy's adjusted cost basis credits the capital dividend account. That balance can be paid to shareholders as a tax-free dividend.
Why the other options are wrong
- BThe proceeds are corporate assets and appear in the accounts.
- CThe benefit is received free of tax by the corporation.
- DThe proceeds may be used for any corporate purpose.
Exam tip
Corporate ownership plus the capital dividend account equals tax-efficient proceeds.
Common mistake
Overlooking that the adjusted cost basis reduces the capital dividend credit.
What this tests
CISRO competency component 1.3 — 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.