EXAM PRACTIVE QUESTIONS 4

Question 1

Samantha surrendered her whole life insurance policy and received proceeds of $80,000. The insurance company informed her that the adjusted cost basis (ACB) of the policy was $30,000. How much is the policy gain, and how much of the gain is considered taxable?

a) $80,000
b) $30,000
c) $50,000
d) No policy gain

Answer 1

Proceeds = $80,000

ACB = $30,000

Policy Gain = $80,000 - $30,000 = $50,000

Since this is a policy gain, 100% of it is considered taxable as income under Canadian tax law.

[Ref. 7.1.3]

Question 2

James is considering terminating his $150,000 whole life insurance policy. The Cash Surrender Value (CSV) is $30,000 and The Adjusted Cost Basis (ACB) is $12,000. There are no policy loans or unpaid premiums

Assuming is marginal tax rate is 40%, how much will James pay in taxes upon surrender?

a) $60,000
b) $30,000
c) $12,000
d) $7,200

Answer 2

Calculate the policy gain:

PolicyGain = CSV −ACB =

$30,000 − $12,000 = $18,000

PolicyGain = CSV − ACB =
$30,000 − $12,000 = $18,000

Apply James’s marginal tax rate (40%) to the gain:

TaxOwed = $18,000 × 0.40 = $7,200

[Ref: 7.3]
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Question 3

Daniel is considering terminating his $150,000 whole life insurance contract. The policy has a cash surrender value (CSV) of $30,000 and an adjusted cost basis (ACB) of $12,000. Assuming there are no outstanding policy loans or unpaid premiums. how much is the policy gain if he cancels the contract?

a) $18,000
b) $12,000
c) $30,000
d) No policy gain

Answer 3

Daniel will realize a policy gain of $18,000 and this will be fully taxable to him.

PolicyGain = CSV − ACB =
$30,000 – $12,000 = $18,000

[Ref: 7.3]

Question 4

Jonathan has a Permanent Life insurance policy and decides to reduce her coverage from $200,000 to $150,000. This is considered to be a partial surrender. He is deemed to have disposed of ___% of her policy.

a) 35%
b) 25%
c) 15%
d) 65%

Answer 4

Percentage disposed = ($200,000 – $150,000) ÷ $200,000 = 25%

[Ref: 7.4]

Question 5

Maria owns a $250,000 whole life insurance policy. She decides not to surrender the entire policy, but instead to reduce the coverage to $200,000. There is some cash value of $36,000 built up in the policy with an Adjusted Cost Basis of $15,000. How much will Maria pay in taxes as a result of reducing her coverage?

a) $1,837.50
b) $5,250
c) $9,000
d) $3,750

Answer 5

Percentage disposed = ( $250,000 – $200,000 ) ÷ $250,000 = 25%

ProratedACB = 25% × $36,000 = $9,000
Prorated CSV = $15,000 × 25% = $3,750

This will result in a policy gain of $5,250 and $1,837.50 in tax payable.

Policy gain = $9,000 – $3,750 = $5,250
Tax payable = $5,250 × 35% = $1,837.50

[Ref: 7.4.2]