LLQP Life Insurance · Component 1.2 · 35% of the exam
A review reveals a client's whole life policy has an outstanding policy loan that has grown with interest for years. The consequence is that:
- AThe insurer will cancel the loan at the next anniversary, since loans older than five years are written off
- The loan and accrued interest reduce the death benefit and, if they exceed the cash value, the policy can lapse
- CThe death benefit will be paid in full, since the loan is a separate debt the estate must settle from other assets
- DThe loan is forgiven at death, since the insurer's security was the policy and the policy has now paid out
Correct answer: B) The loan and accrued interest reduce the death benefit and, if they exceed the cash value, the policy can lapse
Policy loans are secured by the policy's values. Unpaid, they compound and are deducted from the death benefit; if the loan exceeds the cash value the policy terminates. The review should present repayment or restructuring options.
Why the other options are wrong
- AInsurers do not cancel loans; they collect them from the policy.
- CThe loan is deducted from the death benefit.
- DLoans are not forgiven; they are deducted.
Exam tip
Every existing-coverage review should ask: is there a policy loan, and what is it doing to the death benefit?
Common mistake
Reporting the face amount as the death benefit when a loan is outstanding.
What this tests
CISRO competency component 1.2 — 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.