LLQP Life Insurance · Component 2.1 · 30% of the exam
The exemption test for a universal life policy limits:
- AThe death benefit, which cannot exceed a multiple of the annual premium set by the Income Tax Act for exempt policies
- BThe number of beneficiaries, since each beneficiary's share must be separately tested for exemption
- CThe age of the insured, since policies issued after a stated age cannot qualify as exempt
- How much can accumulate in the investment account relative to the insurance, so the policy keeps its tax-exempt status
Correct answer: D) How much can accumulate in the investment account relative to the insurance, so the policy keeps its tax-exempt status
An exempt policy's internal growth is not taxed annually. To stay exempt, the accumulating fund must not exceed the limit set by comparing the policy with a benchmark exempt policy. Over-funding pushes the policy offside; insurers typically increase the face amount or refund deposits to correct it.
Why the other options are wrong
- AThe exemption test limits the fund relative to the coverage, not the death benefit.
- BIt has nothing to do with beneficiaries.
- CIt does not restrict the insured's age.
Exam tip
Exempt test: the accumulating fund must stay within limits set by a benchmark policy. Over-funding threatens tax-exempt status; insurers manage it by adjusting coverage or refunding deposits.
Common mistake
Believing unlimited deposits can be sheltered inside a UL policy.
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.