LLQP - Life License Qualification Program Taxation of Insurance Products Questions and Answers 1 — Questions and Answers
Question 1: Anika takes out a loan against the cash surrender value (CSV) of her universal life insurance policy. The loan amount is $15,000. At the time of the loan, the policy's Adjusted Cost Basis (ACB) is $10,000 and the CSV is $25,000. What are the immediate tax consequences for Anika?
- The entire loan amount of $15,000 is taxable as income.
- The loan is considered a policy withdrawal and the full CSV of $25,000 becomes taxable.
- $5,000 is taxable as income in the year the loan is taken. (Correct answer)
- There are no immediate tax consequences as long as the policy remains in force.
Correct answer: $5,000 is taxable as income in the year the loan is taken.
When a loan is taken from a life insurance policy, the amount of the loan that exceeds the policy's Adjusted Cost Basis (ACB) is considered a taxable policy gain and must be included in the policyowner's income for that year. In this case, the loan is $15,000 and the ACB is $10,000, so the taxable gain is $5,000 ($15,000 - $10,000).
Question 2: A business owner pays the premiums for a disability insurance policy that covers her own loss of income. Which of the following statements correctly describes the tax treatment of the premiums and any potential benefits?
- The premiums are tax-deductible, and the benefits are received tax-free.
- The premiums are not tax-deductible, and the benefits are taxable.
- The premiums are tax-deductible, and the benefits are taxable.
- The premiums are not tax-deductible, and the benefits are received tax-free. (Correct answer)
Correct answer: The premiums are not tax-deductible, and the benefits are received tax-free.
When an individual, including a self-employed business owner, personally pays the premiums for a disability insurance policy with after-tax dollars, the premiums are not tax-deductible. Consequently, any disability benefits received under the policy are tax-free.
Question 3: Priya surrenders her permanent life insurance policy. The cash surrender value (CSV) she receives is $80,000. The Adjusted Cost Basis (ACB) of the policy at the time of surrender is $65,000. How much, if any, must Priya include in her taxable income for the year?
- $80,000
- $15,000 (Correct answer)
- $65,000
- $0
Correct answer: $15,000
When a life insurance policy is surrendered, the policy gain is calculated as the Cash Surrender Value (CSV) minus the Adjusted Cost Basis (ACB). This gain is fully taxable as income. In this scenario, the taxable gain is $80,000 (CSV) - $65,000 (ACB) = $15,000.
Question 4: Which of the following best describes the tax treatment of a lump-sum benefit received from a personally owned critical illness insurance policy in Canada?
- The benefit is fully taxable as income to the recipient.
- The benefit is treated as a capital gain, with 50% being taxable.
- The benefit is received completely tax-free. (Correct answer)
- The benefit is taxable only if it is used for non-medical expenses.
Correct answer: The benefit is received completely tax-free.
In Canada, the lump-sum benefit paid out from a personally owned critical illness insurance policy is received tax-free. This is because the premiums are paid with after-tax dollars and the benefit is not considered income by the Canada Revenue Agency (CRA).
Question 5: An individual purchases a non-registered annuity and opts for prescribed taxation. How will the income payments from this annuity be taxed?
- The entire payment is tax-free as it's a return of capital.
- The interest portion is taxed heavily in the early years and less in later years.
- The entire payment is fully taxable at the annuitant's marginal tax rate.
- A level, uniform portion of each payment, representing interest, is taxed throughout the payment period. (Correct answer)
Correct answer: A level, uniform portion of each payment, representing interest, is taxed throughout the payment period.
A key feature of a prescribed annuity is the level tax treatment. A portion of each payment is considered a tax-free return of capital, and the other portion is considered taxable interest. This taxable interest portion is averaged and remains constant over the life of the annuity, providing a predictable tax liability.
Question 6: A Canadian-controlled private corporation (CCPC) is the owner and beneficiary of a life insurance policy on its key person. Upon the key person's death, the corporation receives a $1,000,000 death benefit. The policy's Adjusted Cost Basis (ACB) at the time of death was $150,000. How does this affect the corporation's Capital Dividend Account (CDA)?
- The CDA is credited with the full death benefit of $1,000,000.
- The CDA is credited with the ACB of the policy, which is $150,000.
- The CDA is credited with the death benefit minus the ACB ($1,000,000 - $150,000), resulting in an $850,000 credit. (Correct answer)
- There is no impact on the CDA; the death benefit is treated as regular corporate income.
Correct answer: The CDA is credited with the death benefit minus the ACB ($1,000,000 - $150,000), resulting in an $850,000 credit.
For a corporately owned life insurance policy, the amount that can be credited to the Capital Dividend Account (CDA) is the total death benefit received, less the policy's Adjusted Cost Basis (ACB) at the time of death. This allows the corporation to pay out tax-free capital dividends to its shareholders. Therefore, the credit to the CDA would be $1,000,000 - $150,000 = $850,000.
LLQP - Life License Qualification Program Taxation of Insurance Products Questions and Answers 1
Anika takes out a loan against the cash surrender value (CSV) of her universal life insurance policy.
The loan amount is $15,000.
At the time of the loan, the policy's Adjusted Cost Basis (ACB) is $10,000 and the CSV is $25,000.
What are the immediate tax consequences for Anika?