LLQP Life Insurance · Component 1.3 · 35% of the exam
Under a share redemption (corporate-owned) buy-sell arrangement, on a shareholder's death:
- AThe shares pass to the deceased's spouse automatically, who then becomes a shareholder alongside the survivor
- BThe surviving shareholder personally buys the shares with proceeds from a policy the survivor owns on the deceased
- CThe corporation must be wound up, since a corporation cannot continue with a deceased shareholder on its register
- The corporation receives the proceeds and redeems the shares, with the tax-free portion credited to the capital dividend account
Correct answer: D) The corporation receives the proceeds and redeems the shares, with the tax-free portion credited to the capital dividend account
In a share redemption plan the corporation owns the policies and buys back the deceased's shares. The death benefit in excess of the policy's ACB is credited to the capital dividend account, allowing tax-free capital dividends — a key advantage the curriculum lists under business insurance.
Why the other options are wrong
- AShares do not pass automatically to a spouse under a buy-sell.
- BPersonal purchase by the survivor describes a cross-purchase arrangement.
- CThe corporation continues; redemption is how it buys back the deceased's shares.
Exam tip
Share redemption: corporation owns the policies, receives the proceeds, redeems the shares; the death benefit above ACB is credited to the CDA.
Common mistake
Mixing up who owns the policy under cross-purchase versus share redemption.
What this tests
CISRO competency component 1.3 — 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.