LLQP Life Insurance · Component 1.2 · 35% of the exam
The 'adjusted cost basis' (ACB) of a life insurance policy is important because:
- AIt is the death benefit payable at death, adjusted for any policy loans that remain outstanding
- BIt is relevant only to group policies, where the employer must report the cost of the coverage as a benefit
- A disposition, such as a surrender or a policy loan above the ACB, produces a taxable gain to the extent proceeds exceed it
- DIt sets the premium, since insurers price permanent policies on the cost basis the CRA assigns to them
Correct answer: C) A disposition, such as a surrender or a policy loan above the ACB, produces a taxable gain to the extent proceeds exceed it
The ACB is broadly the premiums paid less the net cost of pure insurance (and other adjustments). On surrender, the cash value above the ACB is a policy gain taxed as income. As the ACB declines over time, a surrender late in the policy's life can carry a substantial tax cost.
Why the other options are wrong
- AThe ACB is not the death benefit and is usually far smaller.
- BThe ACB matters for individual policies, where dispositions create policy gains.
- DThe ACB is a tax attribute; it does not set the premium.
Exam tip
Policy gain on surrender = cash value minus ACB. The ACB falls over time, so late surrenders can be surprisingly taxable.
Common mistake
Assuming cash value can be withdrawn tax-free.
What this tests
CISRO competency component 1.2 — Assess the client's needs and situation — which is weighted at 35% of the Life Insurance module. Written against the published curriculum.
More from component 1
- A client's existing policies were all sold by another agent who has left the business. The reviewing agent should:
- A client supports an adult child with a permanent disability who will never be self-sufficient. In the needs analysis this is:
- A self-employed client's income fluctuates widely year to year. When determining the income to replace, the agent should:
- A 58-year-old client plans to retire at 65 and has a pension that will pay a survivor benefit. How does time to retirement affect the life insurance need?
- Which of the following is a capital expense arising at death, rather than an ongoing income need?
- A client is the sole income earner in a household with a stay-at-home spouse and two young children. The greatest risk that life insurance on the client addresses is:
Practice the whole Life Insurance module
Timed sets weighted like the exam, and review of every question you miss. Free to start.