LLQP Life Insurance · Component 4.2 · 10% of the exam
A death benefit is left with the insurer under an interest-only settlement option. The tax treatment is:
- AEverything is tax-free, since the death benefit and everything derived from it is received without any tax being payable at all
- BEverything is taxable, since leaving the proceeds with the insurer converts them into an investment
- CThe insurer pays the tax on the beneficiary's behalf, since it holds the funds and earns the interest
- The death benefit remains tax-free, but the interest earned on it is taxable to the beneficiary
Correct answer: D) The death benefit remains tax-free, but the interest earned on it is taxable to the beneficiary
The tax-free character attaches to the death benefit. Once it earns interest — under any settlement option — that interest is income to the recipient.
Why the other options are wrong
- AInterest earned on the proceeds is taxable to the beneficiary.
- BThe principal is not taxable.
- CThe beneficiary is taxed on the interest.
Exam tip
Death benefit tax-free; interest on it taxable.
Common mistake
Telling a beneficiary that settlement option payments are entirely tax-free.
What this tests
CISRO competency component 4.2 — Provide customer service during the validity period of the coverage — which is weighted at 10% of the Life Insurance module. Written against the published curriculum.
More from component 4
- After a policy is reinstated, the contestability period:
- A revocable beneficiary designation is changed by:
- A client asks the agent to hold the beneficiary change form 'until next week' and dies in the meantime. The consequence is that:
- A client wants to reduce the face amount of her policy because her needs have fallen. The agent should note that:
- A client is unable to pay premiums temporarily on a whole life policy. Before letting it lapse, the agent should suggest:
- A client's term policy is being replaced with a new one from another insurer because it is cheaper and he remains healthy. To protect the client, the agent should ensure that:
Practice the whole Life Insurance module
Timed sets weighted like the exam, and review of every question you miss. Free to start.