LLQP Life Insurance · Component 1.3 · 35% of the exam
For a business with three equal shareholders, a cross-purchase buy-sell agreement would require:
- AOne policy owned jointly by all three, with the proceeds divided between the survivors on any death
- BThree policies owned by the corporation, one on each shareholder, with the corporation as beneficiary
- CNo insurance at all, since the survivors can fund the purchase from the business's retained earnings
- Six policies, each shareholder owning a policy on each of the other two
Correct answer: D) Six policies, each shareholder owning a policy on each of the other two
Under cross-purchase every owner insures every other owner: with three owners that is 3 × 2 = 6 policies. The administrative burden grows quickly, which is why corporate ownership (share redemption or a promissory-note arrangement) is favoured for larger groups.
Why the other options are wrong
- AOne policy cannot fund three owners buying from each other.
- BCorporate-owned policies describe share redemption, not cross-purchase.
- CWithout insurance the survivors must find the purchase price elsewhere.
Exam tip
Cross-purchase policies = n × (n − 1). Beyond a few owners, consider corporate ownership.
Common mistake
Planning a cross-purchase with a single policy per owner.
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.