Taxation of Insurance

KNOWLEDGE EXPECTED OF: CFP® Professionals

Highest Knowledge Level: Awareness

Knowledge Levels and Associated Verbs


Awareness
The state of being aware that something exists / to have familiarity with a particular activity or subject
Understanding
To comprehend the general relationship of particulars / to have an expertise with how something works
Application
Ability to put information to use / to use knowledge for relevant, practical purposes
Evaluation
To judge or conclude by utilizing data / a systematic determination of something’s worth or significance
Define
To state exactly the meaning of
Identify
To be aware of / to recognize and correctly name / to locate an appropriate resource
Explain
To make clear the meaning of / to describe something in more detail or reveal relevant facts or ideas related to it
Determine
To ascertain / to come to a decision, such as by investigation or reasoning
Compare
To note the similarities and differences between two or more things
Estimate
To determine an approximate value for
Calculate
To find the value using mathematics
Convert
To change from one form or purpose to another
Evaluate
To reach a conclusion or make a through careful study
Interpret
To give the meaning of / to construe or understand / to translate orally

Hold cursor over or click on each term to read its definition.


Additional Knowledge Expected of CFP Professionals
  • Identify the tax treatment associated with an insurance1 policy.
    • When premiums are paid for a policy by the insured
    • When premiums are paid for a policy by the insured’s employer2
    • When premiums are shared between an insured and their employer
    • When benefits are received for a policy where an insured paid the premiums
    • When benefits are received for a policy where an insured’s employer paid the premiums
    • When benefits are received for a policy where an insured and their employer shared the premiums 
  • Define terms associated with the taxation of a life insurance policy, such as:
    • Face amount
    • Exempt policy
    • Non-exempt policy
    • Net cost of pure insurance (NCPI)
    • Adjusted cost basis (ACB)
    • Accumulating amount (or fund)
    • Fair market value (FMV)
    • Cash surrender value (CSV)
    • Maximum Tax Accumulation Reserve (MTAR) 
  • Identify events when a life insurance policy is deemed to have been disposed, such as: 
    • Transfer of the policy ownership
    • Surrender of a portion or the entire policy
    • A policy loan (after March 31, 1978)
    • Maturity of the policy during the insured’s lifetime 
  • Identify when transfers of a life insurance policy may be made on a tax-deferred basis.
    • To children or grandchildren where the child or grandchild is the life insured
    • To a spouse 
  • Identify that there may be a tax impact on the disposition of a life insurance policy. 

REFERENCES

1 Including major types of insurance such as life, disability, critical illness and long-term care. 

2 Employer includes both the insured’s employer and the employer of the insured’s spouse.