LLQP Life Insurance · Component 2.1 · 30% of the exam
A policy's death benefit is paid to a corporation that owned the policy. The corporation's tax treatment of the receipt is:
- AFully taxable as income in the year received, since a corporation cannot receive a tax-free death benefit
- BTaxable as a capital gain, since the proceeds exceed the premiums the corporation paid for the policy
- CDeductible from the corporation's income, since the proceeds replace the loss the corporation suffered
- Tax-free, with the amount above the policy's ACB credited to the capital dividend account
Correct answer: D) Tax-free, with the amount above the policy's ACB credited to the capital dividend account
Death benefits are tax-free to any beneficiary, corporate or individual. The corporation additionally receives a CDA credit for the excess over ACB, which is the route to distributing the proceeds tax-free to shareholders.
Why the other options are wrong
- ADeath benefits are not income to the corporation.
- BThere is no capital gain on a death benefit.
- CA receipt is not a deduction.
Exam tip
Corporate death benefit: tax-free receipt + CDA credit (benefit − ACB).
Common mistake
Forgetting that the ACB portion does not go into the CDA.
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.