LLQP Life Insurance · Component 2.1 · 30% of the exam
A shareholders' agreement requires each shareholder to be insured but does not say who owns the policies. Before recommending a structure the agent should determine:
- ANothing further, since any ownership structure produces the same result once the agreement is signed and the policies are in force
- BWhether the shareholders are related, since related shareholders must use a cross-purchase structure
- COnly the premium budget, since the structure follows from what the shareholders can afford to pay
- Whether cross-purchase or share redemption fits the shareholders, the tax position and the agreement, with their advisors
Correct answer: D) Whether cross-purchase or share redemption fits the shareholders, the tax position and the agreement, with their advisors
Cross-purchase needs a policy for each pair of owners and becomes unwieldy with several shareholders; corporate ownership centralizes it. The tax outcomes differ (CDA, cost base of shares). This is a coordinated decision, not an insurance-only one.
Why the other options are wrong
- AThe structures produce different tax and administrative outcomes.
- BWhether shareholders are related does not determine the structure.
- CThe premium budget is one input; structure and tax are the main decision.
Exam tip
Cross-purchase for few owners; corporate redemption for many. Coordinate with legal and tax advisors before the policies are applied for.
Common mistake
Applying for buy-sell policies before the agreement's structure is decided.
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.