LLQP Life Insurance · Component 1.3 · 35% of the exam
How should the amount of buy-sell insurance be determined?
- By the value of each owner's interest under the agreement's valuation method, reviewed as the business changes
- BBy the insurer's maximum for the owners' ages and incomes, since that is the most coverage that can be obtained
- CBy the corporation's annual revenue, since revenue is the simplest measure of what the business is worth
- DBy the owners' salaries, since each owner's salary reflects the value of their contribution to the business
Correct answer: A) By the value of each owner's interest under the agreement's valuation method, reviewed as the business changes
The buy-sell agreement sets how the business is valued (fixed price, formula, or appraisal). Insurance should fund that value for each owner's share, and because values change, the coverage and the agreement need periodic review.
Why the other options are wrong
- BThe insurer's limit is a ceiling, not a target.
- CRevenue is not value.
- DSalaries have no relation to the value of an ownership interest.
Exam tip
Buy-sell coverage = each owner's share of the agreed valuation. Review both when the business grows.
Common mistake
Leaving buy-sell coverage at the amount set when the business was small.
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.