LLQP - Life License Qualification Program Taxation of Insurance Products 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?

Accepted Answer

$5,000 is taxable as income in the year the loan is taken.

Answer

The entire loan amount of $15,000 is taxable as income.

Answer

The loan is considered a policy withdrawal and the full CSV of $25,000 becomes taxable.

Answer

There are no immediate tax consequences as long as the policy remains in force.

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?

Accepted Answer

The premiums are not tax-deductible, and the benefits are received tax-free.

Answer

The premiums are tax-deductible, and the benefits are received tax-free.

Answer

The premiums are not tax-deductible, and the benefits are taxable.

Answer

The premiums are tax-deductible, and the benefits are taxable.

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?

Accepted Answer

$15,000

Answer

$80,000

Answer

$65,000

Answer

$0

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?

Accepted Answer

The benefit is received completely tax-free.

Answer

The benefit is fully taxable as income to the recipient.

Answer

The benefit is treated as a capital gain, with 50% being taxable.

Answer

The benefit is taxable only if it is used for non-medical expenses.

Question 5

An individual purchases a non-registered annuity and opts for prescribed taxation. How will the income payments from this annuity be taxed?

Accepted Answer

A level, uniform portion of each payment, representing interest, is taxed throughout the payment period.

Answer

The entire payment is tax-free as it's a return of capital.

Answer

The interest portion is taxed heavily in the early years and less in later years.

Answer

The entire payment is fully taxable at the annuitant's marginal tax rate.

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)?

Accepted Answer

The CDA is credited with the death benefit minus the ACB ($1,000,000 - $150,000), resulting in an $850,000 credit.

Answer

The CDA is credited with the full death benefit of $1,000,000.

Answer

The CDA is credited with the ACB of the policy, which is $150,000.

Answer

There is no impact on the CDA; the death benefit is treated as regular corporate income.