LLQP Life Insurance · Component 1.3 · 35% of the exam
An agent increases the assumed rate of return used to discount a family's future income needs. The effect on the calculated lump sum is that it:
- decreases, because a smaller amount of capital can produce the same income stream
- Bincreases, because a higher return means the family will require more capital overall
- Cstays the same, since the discount rate affects only the timing of the payments
- Dbecomes impossible to calculate without also changing the assumed inflation rate
Correct answer: A) decreases, because a smaller amount of capital can produce the same income stream
A higher assumed return makes each dollar of capital work harder, reducing the lump sum. Optimistic assumptions therefore understate the coverage required, which is why a conservative real rate is preferred.
Why the other options are wrong
- BA higher return reduces the capital needed rather than increasing it.
- CThe discount rate directly changes the present value of the need.
- DThe calculation works with the real rate, however it is expressed.
Exam tip
An optimistic return assumption quietly shrinks the recommended coverage.
Common mistake
Using a flattering rate of return to make the premium look affordable.
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.