LLQP Life Insurance · Component 1.3 · 35% of the exam
In the income replacement approach, why is the survivors' income target usually set below 100% of the deceased's income?
- Because some expenses, such as the deceased's own consumption, end at death, so less than full income is needed
- BBecause insurers limit death benefits to a percentage of income, so the analysis must stay within what can be issued
- CBecause survivors should live more modestly after a death, so the analysis builds in a reduction in their standard of living over time
- DBecause inflation reduces the value of the income over time, so the target is set lower to reflect the shrinking real amount
Correct answer: A) Because some expenses, such as the deceased's own consumption, end at death, so less than full income is needed
The target is the survivors' needs, not the deceased's income. Expenses attributable to the deceased disappear. A common working assumption is a fraction of prior income, adjusted for the family's actual budget.
Why the other options are wrong
- BThe target is set by the family's need, not by insurer limits.
- CThe goal is to maintain the standard of living, not reduce it.
- DInflation raises, not lowers, the need over time.
Exam tip
Replace the survivors' needs, which are usually a fraction of the deceased's income; but build the figure from the family's budget, not a rule of thumb.
Common mistake
Setting the target at 100% of income without removing the deceased's own expenses.
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.