LLQP Life Insurance · Component 2.1 · 30% of the exam
A corporation that owns a life insurance policy on its shareholder transfers the policy to the shareholder personally. The tax issue this raises is:
- AThe policy becomes group insurance, since it is now held by an employee rather than the employer
- BThe beneficiary changes automatically to the shareholder's estate, since the corporation is no longer the owner
- The transfer is a disposition that can create a policy gain and a shareholder benefit unless fair value is paid
- DNone, since transfers between a corporation and its shareholders are tax-free under the related-party rules in the Income Tax Act
Correct answer: C) The transfer is a disposition that can create a policy gain and a shareholder benefit unless fair value is paid
Transfers of policies between a corporation and its shareholders are dispositions with specific tax rules on the proceeds deemed received and the new ACB. These are transactions to plan with tax advisors, not routine amendments.
Why the other options are wrong
- AOwnership transfer does not make it group insurance.
- BThe beneficiary does not change automatically.
- DTransfers between a corporation and shareholders are dispositions with tax consequences.
Exam tip
Policy transfers between corporation and shareholder are dispositions with specific rules on proceeds and new ACB — plan them with tax advisors.
Common mistake
Treating a corporate-to-shareholder policy transfer as a routine amendment.
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.