LLQP Life Insurance · Component 2.1 · 30% of the exam
The capital dividend account (CDA) of a private corporation is credited with:
- The death benefit received by the corporation in excess of the policy's ACB, allowing tax-free capital dividends
- BAll life insurance premiums paid by the corporation, so that shareholders recover the cost of coverage tax-free
- CNothing related to insurance, since the CDA is reserved for the non-taxable half of capital gains on investments
- DThe policy's cash value each year, so that shareholders can withdraw the growth as tax-free dividends
Correct answer: A) The death benefit received by the corporation in excess of the policy's ACB, allowing tax-free capital dividends
When a corporation receives a death benefit, the amount above the policy's ACB goes to the CDA and can be paid out as tax-free capital dividends. This is central to corporate-owned insurance planning and to share redemption buy-sell arrangements.
Why the other options are wrong
- BPremiums are not credited to the CDA.
- CThe CDA is the mechanism for paying out death benefits tax-free.
- DCash value growth is not a CDA credit.
Exam tip
CDA credit = death benefit received − policy's ACB. Then capital dividends can be paid to shareholders tax-free.
Common mistake
Believing the whole death benefit, including the ACB portion, flows to 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.