Patrick invested €50,000 in a life assurance tracker bond in 2014 and it matured in February 2020 at €55,000, before tax. What amount did he receive from the life company?

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Prepare for the QFA Investments Exam 1. Study with flashcards and multiple-choice questions with detailed explanations. Enhance your understanding and succeed on your exam!

Multiple Choice

Patrick invested €50,000 in a life assurance tracker bond in 2014 and it matured in February 2020 at €55,000, before tax. What amount did he receive from the life company?

Explanation:
Tax is charged only on the growth of a life assurance tracker bond when you encash or mature it, at the investor’s marginal rate. The original amount invested is not taxed again. Here, the investment grew from 50,000 to 55,000, so the gain is 5,000. The applicable marginal tax rate (including any USC/PRSI that applies) is 41%, so the tax on the gain is 5,000 × 0.41 = 2,050. Subtracting that from the maturity amount gives 55,000 − 2,050 = 52,950. That is the amount received after tax.

Tax is charged only on the growth of a life assurance tracker bond when you encash or mature it, at the investor’s marginal rate. The original amount invested is not taxed again. Here, the investment grew from 50,000 to 55,000, so the gain is 5,000. The applicable marginal tax rate (including any USC/PRSI that applies) is 41%, so the tax on the gain is 5,000 × 0.41 = 2,050. Subtracting that from the maturity amount gives 55,000 − 2,050 = 52,950. That is the amount received after tax.

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