LLQP Life Insurance · Component 2.1 · 30% of the exam
The 'net cost of pure insurance' (NCPI) matters to a policyholder because:
- AIt sets the death benefit, since the insurer prices the coverage on the net cost of the pure insurance element it is carrying each year
- BIt is refundable to the policyholder at surrender, since it represents mortality charges that were never used
- It is deducted annually from the ACB, so the ACB falls and the taxable gain on disposition rises
- DIt is a premium tax levied by the province on the pure insurance portion of each premium the client pays
Correct answer: C) It is deducted annually from the ACB, so the ACB falls and the taxable gain on disposition rises
The ACB roughly equals premiums paid less the cumulative NCPI. Because NCPI grows with age, the ACB of a long-held policy can fall to zero, making almost the whole cash value taxable on surrender.
Why the other options are wrong
- ANCPI is a tax calculation input, not the coverage amount.
- BNothing is refunded; NCPI is a calculation used in determining the ACB.
- DIt is not a tax; it is the mortality cost used in the ACB formula.
Exam tip
ACB ≈ premiums − NCPI. NCPI rises with age, so old policies have low ACB and big potential gains.
Common mistake
Assuming ACB equals total premiums paid.
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.