LLQP Life Insurance · Component 2.1 · 30% of the exam
Dividends paid in cash from a participating policy are:
- AAlways fully taxable as investment income in the year received, in the same way as interest on a deposit
- BDeductible from the policyholder's income, since they represent a return of premium the owner has already paid
- CTaxable as capital gains, since they represent growth in the value of the policy over time
- A return of premium that reduces the policy's ACB, taxable only once cumulative dividends exceed the ACB
Correct answer: D) A return of premium that reduces the policy's ACB, taxable only once cumulative dividends exceed the ACB
Cash dividends and premium-reduction dividends reduce the policy's adjusted cost basis. Until the ACB is exhausted they are not taxable; beyond that point a policy gain arises. Dividends used to buy paid-up additions stay inside the exempt policy.
Why the other options are wrong
- ACash dividends are a return of premium first.
- BDividends are not deductible.
- CPolicy gains are income, not capital gains.
Exam tip
Cash and premium-reduction dividends reduce ACB; once ACB reaches zero, further dividends are taxable policy gains.
Common mistake
Treating participating dividends like corporate share dividends.
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.