LLQP Life Insurance · Component 1.3 · 35% of the exam
A shareholder has lent substantial money to his company and wants the loan repaid to his family at his death. Insurance can address this by:
- Areplacing the company's operating income during the year following the death
- providing the company with funds to repay the shareholder loan to the estate
- Celiminating the loan entirely, since shareholder loans are forgiven on death
- Dconverting the loan into shares that the estate can then sell in the market
Correct answer: B) providing the company with funds to repay the shareholder loan to the estate
A shareholder loan is an asset of the estate and a liability of the company, but the company may lack the cash to repay it. Corporate-owned coverage provides the funds, and repayment of the loan itself is not taxable.
Why the other options are wrong
- AOperating income is a separate need from repaying the loan.
- CA shareholder loan is not forgiven by the death of the lender.
- DConversion to shares does not produce the cash the estate needs.
Exam tip
A shareholder loan is an estate asset the company may be unable to repay.
Common mistake
Overlooking shareholder loans when reviewing a business owner's estate.
What this tests
CISRO competency component 1.3 — 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.