LLQP Life Insurance · Component 2.1 · 30% of the exam
A key person policy is owned by a corporation on its founder. The founder retires and the corporation no longer needs the coverage. Which option keeps the coverage useful?
- Transfer the policy to the founder, a disposition with tax consequences, for personal estate needs
- BChange the life insured to the new chief executive, so the corporation's key person coverage continues without a fresh application
- CNothing can be done, since a corporate-owned policy must remain with the corporation until the life insured dies
- DLapse the policy, since a key person policy has no purpose once the key person has left the business
Correct answer: A) Transfer the policy to the founder, a disposition with tax consequences, for personal estate needs
A policy on a retiring key person can be transferred to that person, preserving coverage that may be hard to replace at their age. The transfer is a disposition: the corporation may have a policy gain and the founder a benefit unless fair value is paid.
Why the other options are wrong
- BThe insured on a policy cannot be changed.
- CTransfer is a standard option.
- DLapsing throws away insurability that may be irreplaceable.
Exam tip
Retiring key person: consider transferring the policy to them; plan the tax on the transfer.
Common mistake
Letting a valuable policy on an older insured lapse when the business need ends.
What this tests
CISRO competency component 2.1 — Analyze the available products that meet the client's needs — which is weighted at 30% of the Life Insurance module. Written against the published curriculum.
More from component 2
- A client has a need lasting about twenty years and compares a ten-year and a twenty-year term policy. The main point to explain is that:
- A client exercises the conversion privilege on his term policy. The permanent premium will be based on:
- A client notices that a small policy costs proportionately more per unit of coverage than a larger one. The explanation is that:
- A client wants to pay monthly rather than annually. The agent should explain that monthly payment:
- A client asks why dividends from her participating policy are not taxed like interest from a bank. The reason is that a dividend is:
- A universal life policyholder is choosing among the investment options inside her policy. She should understand that:
Practice the whole Life Insurance module
Timed sets weighted like the exam, and review of every question you miss. Free to start.