LLQP Life Insurance · Component 1.1 · 35% of the exam
A client owns a rental property with a mortgage and positive monthly cash flow. In determining his situation the agent should note that on his death:
- Athe lender must discharge the mortgage from the estate before any other creditor is paid
- the mortgage continues and the deemed disposition may create a tax liability
- Cthe property passes free of tax because rental real estate is treated as a business asset
- Dthe rental income would be received tax-free by the survivors as compensation
Correct answer: B) the mortgage continues and the deemed disposition may create a tax liability
A rental property is not a principal residence, so accrued gains are realized on death unless a spousal rollover applies. The mortgage continues, and the survivors must either service it or sell the property.
Why the other options are wrong
- AThe lender is a secured creditor but does not rank ahead of everything.
- COnly a principal residence attracts the exemption from the deemed disposition.
- DRental income remains taxable in the recipient's hands.
Exam tip
Rental property means both a continuing mortgage and a taxable disposition.
Common mistake
Treating all real estate as though the principal residence exemption applied.
What this tests
CISRO competency component 1.1 — Assess the client's needs and situation — which is weighted at 35% of the Life Insurance module. Written against the published curriculum.
More from component 1
- A client's existing policies were all sold by another agent who has left the business. The reviewing agent should:
- A client supports an adult child with a permanent disability who will never be self-sufficient. In the needs analysis this is:
- A self-employed client's income fluctuates widely year to year. When determining the income to replace, the agent should:
- A 58-year-old client plans to retire at 65 and has a pension that will pay a survivor benefit. How does time to retirement affect the life insurance need?
- Which of the following is a capital expense arising at death, rather than an ongoing income need?
- A client is the sole income earner in a household with a stay-at-home spouse and two young children. The greatest risk that life insurance on the client addresses is:
Practice the whole Life Insurance module
Timed sets weighted like the exam, and review of every question you miss. Free to start.