LLQP Taxation of Insurance Products 2

Question 1

Are life insurance death benefit proceeds taxable in Canada?

Accepted Answer

No, death benefit proceeds paid to a named beneficiary are generally received tax-free

Answer

Life insurance death benefit proceeds paid to a named beneficiary are generally received tax-free in Canada, which is one of the key advantages of life insurance.

Question 2

How is the cash surrender value of a life insurance policy taxed when the policyholder surrenders it?

Accepted Answer

The amount exceeding the policy's adjusted cost basis (ACB) is taxable as income

Answer

When a policy is surrendered, the amount received in excess of the policy's adjusted cost basis (ACB) is taxable as income to the policyholder.

Question 3

What is the tax treatment of disability insurance benefits in Canada?

Accepted Answer

Benefits are tax-free if the employee pays the premiums, and taxable if the employer pays the premiums

Answer

The taxability of disability benefits depends on who pays the premiums: employee-paid premiums result in tax-free benefits, while employer-paid premiums result in taxable benefits.

Question 4

What is the 'capital dividend account' (CDA) and how does it relate to corporate-owned life insurance?

Accepted Answer

A notional tax account that allows corporations to distribute life insurance death benefit proceeds as tax-free capital dividends to shareholders

Answer

The CDA is a notional account that tracks the tax-free portion of certain receipts, including life insurance death benefits, allowing corporations to distribute these amounts as tax-free capital dividends.

Question 5

How are critical illness insurance benefits taxed in Canada?

Accepted Answer

Benefits received under an individually-owned critical illness policy are generally tax-free

Answer

Critical illness insurance benefits received under an individually-owned policy are generally tax-free because the premiums were paid with after-tax dollars.

LLQP - Life License Qualification Program Practice Test

LLQP - Life License Qualification Program Practice Test

LLQP Taxation of Insurance Products 2