LLQP Ethics & Professional Practice · Component 1.3 · 60% of the exam
A 'policy loan' provision in a permanent policy:
- AIs an advance of the death benefit that the insurer recovers only if the insured dies within the loan period stated in the contract
- BIs interest-free, since the owner is borrowing the owner's own money from the policy's cash value
- CEnds the contract, since a policy on which a loan is outstanding can no longer pay a death benefit
- Lets the owner borrow against the cash value with interest; unpaid loans reduce the benefit and can cause lapse
Correct answer: D) Lets the owner borrow against the cash value with interest; unpaid loans reduce the benefit and can cause lapse
Policy loans are an ownership right with consequences the agent should explain, including possible tax on loans exceeding the adjusted cost basis.
Why the other options are wrong
- AIt is a loan with interest, not an advance.
- BPolicy loans accrue interest.
- CThe policy continues unless the loan exhausts the value.
Exam tip
Policy loan: interest, reduces benefit, can lapse the policy, possible tax.
Common mistake
Ignoring a growing loan balance until the policy lapses.
What this tests
CISRO competency component 1.3 — 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.