LLQP Ethics & Professional Practice · Component 1.4 · 60% of the exam
A client wants to deposit far more into a universal life policy than the plan anticipated. The agent should warn that:
- the policy may cease to be exempt, exposing the accumulating growth to annual taxation
- Boverfunding is prohibited and the insurer will terminate the contract without notice
- Cexcess deposits are simply refunded by the insurer at the end of the calendar year
- Dthe death benefit is automatically reduced to bring the contract back within its limits
Correct answer: A) the policy may cease to be exempt, exposing the accumulating growth to annual taxation
An exempt policy shelters growth from annual taxation as long as it stays within the limits in the tax rules. Overfunding can breach the test, and insurers usually manage this by returning amounts or increasing the death benefit.
Why the other options are wrong
- BOverfunding is managed by the insurer, not met with termination.
- CInsurers act at the time of the deposit rather than refunding annually.
- DThe death benefit may be increased to preserve exemption, not reduced.
Exam tip
Exempt status is what shelters the growth; overfunding threatens it.
Common mistake
Encouraging maximum deposits without mentioning the exempt test.
What this tests
CISRO competency component 1.4 — Integrate into practice the legal aspects of insurance and annuity contracts — which is weighted at 60% of the Ethics & Professional Practice module. Written against the published curriculum.
More from component 1
- An 'assignee' of a life insurance policy is:
- A corporation as policyowner and beneficiary of a policy on a key employee:
- A 'trustee' named to receive proceeds on behalf of a beneficiary:
- The 'automatic premium loan' (APL) provision:
- A life insurance contract 'matures' when:
- The 'assignment' provision typically states that:
Practice the whole Ethics & Professional Practice module
Timed sets weighted like the exam, and review of every question you miss. Free to start.