LLQP Life Insurance · Component 1.1 · 35% of the exam
A self-employed client's income fluctuates widely year to year. When determining the income to replace, the agent should:
- AUse the lowest year, so the recommendation is conservative and the client is never over-insured
- BLeave self-employment income out, since an underwriter will not accept it as proof of insurable income
- Use an average of recent years and consider the stability of the business
- DUse the highest year, since that shows the family's true earning potential if the business does well
Correct answer: C) Use an average of recent years and consider the stability of the business
For variable income, an average over several years, adjusted for the trend and the business's stability, gives a defensible replacement figure. It also anticipates financial underwriting, which will ask for the same evidence.
Why the other options are wrong
- AThe worst year understates the loss and under-insures the family.
- BSelf-employment income is real income; ignoring it leaves the family with no replacement.
- DThe best year overstates the loss, and an underwriter will not accept it.
Exam tip
Use several years of tax returns for a self-employed client; it is what financial underwriting will ask for anyway.
Common mistake
Picking a single unusual year as the income to replace.
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 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:
- A client owns a cottage that has appreciated substantially. Why does this matter in a life insurance needs analysis?
Practice the whole Life Insurance module
Timed sets weighted like the exam, and review of every question you miss. Free to start.