LLQP Life Insurance · Component 1.3 · 35% of the exam
If a needs analysis assumes a higher rate of investment return on the insurance proceeds, the calculated amount of insurance will be:
- ADoubled, since a higher return means the proceeds must be large enough to withstand greater market volatility
- BUnchanged, since the return assumption affects only how long the proceeds last and not how much is needed
- Lower, because less capital is needed to generate the same income
- DHigher, since a higher return assumption is riskier and the analysis adds a margin of safety to compensate
Correct answer: C) Lower, because less capital is needed to generate the same income
The capital needed to produce a target income falls as the assumed return rises. That is also why an optimistic return assumption is dangerous: it understates the need. Conservative, after-tax, after-inflation returns are the professional choice.
Why the other options are wrong
- ADoubling has no basis; the effect is a reduction proportional to the return assumption.
- BThe assumed return directly changes the capital required.
- DA higher return means less capital is required, not more.
Exam tip
Optimistic return assumptions shrink the calculated need and quietly under-insure. Use conservative, after-tax, real returns.
Common mistake
Using a gross nominal return in the needs calculation.
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.