LLQP Life Insurance · Component 2.1 · 30% of the exam
An 'exempt' life insurance policy is one whose:
- Internal cash value growth is not subject to annual accrual taxation, because the policy stays within the exemption test
- BPremiums are tax-deductible, since the policy has been registered with the CRA as an exempt plan
- CBeneficiary pays no probate on the proceeds, since exempt policies pass outside the estate
- DDeath benefit is exempt from creditors in all cases, whoever is named as beneficiary and whenever the policy was purchased
Correct answer: A) Internal cash value growth is not subject to annual accrual taxation, because the policy stays within the exemption test
Most individually owned policies in Canada are exempt, which is what allows tax-deferred accumulation. A non-exempt policy is taxed on accrual annually. Keeping a UL policy exempt is a design and administration task the insurer manages within statutory limits.
Why the other options are wrong
- BExempt status concerns internal growth, not premium deductibility.
- CProbate depends on beneficiary designation, not exempt status.
- DCreditor protection depends on beneficiary designation, not exempt status.
Exam tip
Exempt policy = internal growth not taxed annually. Most Canadian individual policies are exempt; keeping UL exempt is a design task.
Common mistake
Confusing 'exempt' with 'tax-free' in every sense.
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.