LLQP Life Insurance · Component 2.1 · 30% of the exam
Dividends left to accumulate at interest in a participating policy are:
- AAdded to the death benefit as paid-up insurance, so the family receives the accumulated total at death
- BUsed to buy one-year term insurance, so the policy's total coverage grows each year the dividend is declared
- Held in a side account whose interest is taxable to the policyholder annually
- DTax-free forever, since anything held inside a life insurance contract grows without tax under the exempt rules
Correct answer: C) Held in a side account whose interest is taxable to the policyholder annually
Accumulated dividends sit in an interest-bearing account outside the policy's exempt status; the interest is taxable each year like any deposit account. Paid-up additions, by contrast, grow inside the policy.
Why the other options are wrong
- AAdding to the death benefit as paid-up insurance is the paid-up additions option.
- BBuying term is the enhanced option.
- DInterest on accumulated dividends is taxable annually.
Exam tip
Accumulation at interest sits outside the policy's exempt status, so its interest is taxed each year like a savings account.
Common mistake
Assuming everything connected to a life policy grows tax-sheltered.
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.