LLQP Life Insurance · Component 1.3 · 35% of the exam
How is the amount of key person insurance commonly estimated?
- ABy the business's tax bill for the year, since the loss of a key person reduces profits and therefore the taxes the business pays
- BBy the insurer's minimum face amount for corporate-owned policies, since that is the standard starting point
- By a multiple of salary, the profit attributable to the person, or the cost of replacing them
- DBy the key person's age, since younger employees have more years of contribution ahead of them
Correct answer: C) By a multiple of salary, the profit attributable to the person, or the cost of replacing them
There is no single formula; common approaches include salary multiples, contribution to profits, and replacement cost. Financial underwriting will expect a rationale, and the agent should document how the figure was reached.
Why the other options are wrong
- AThe tax bill is unrelated to the person's economic value.
- BMinimums are not a valuation.
- DAge affects premium, not the loss to the business.
Exam tip
Justify key person amounts: salary multiple, profit contribution, or replacement cost. Underwriters will ask.
Common mistake
Applying for a round number with no supporting rationale.
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.