LLQP Life Insurance · Component 2.1 · 30% of the exam
In universal life, 'leveraging' the policy for retirement income has which principal risk?
- AThe insurer cancels the policy once it learns that the client has borrowed against it from a third-party lender rather than from the insurer
- BThe death benefit becomes taxable to the beneficiary, since the policy has been used to produce income during life
- If the loan plus interest outgrows the policy's value, the lender may call it or the policy may lapse
- DThere is no risk, since the loan is repaid from the death benefit and the client never has to make a payment
Correct answer: C) If the loan plus interest outgrows the policy's value, the lender may call it or the policy may lapse
Leverage works while the policy's value comfortably exceeds the loan. Poor returns or rising interest rates can invert that, forcing repayment or a lapse — and a lapse with a loan against a low ACB produces a taxable policy gain with no cash to pay it.
Why the other options are wrong
- AThe insurer does not cancel the policy; the lender's actions or lapse are the risks.
- BThe death benefit remains tax-free; the risk is a living-side lapse.
- DLeverage carries real, compounding risks.
Exam tip
Leveraged insurance: model rising interest and poor returns before recommending, and disclose the lapse-with-gain scenario.
Common mistake
Presenting leveraging as a tax-free retirement income with no downside.
What this tests
CISRO competency component 2.1 — Analyze the available products that meet the client's needs — which is weighted at 30% of the Life Insurance module. Written against the published curriculum.
More from component 2
- A client has a need lasting about twenty years and compares a ten-year and a twenty-year term policy. The main point to explain is that:
- A client exercises the conversion privilege on his term policy. The permanent premium will be based on:
- A client notices that a small policy costs proportionately more per unit of coverage than a larger one. The explanation is that:
- A client wants to pay monthly rather than annually. The agent should explain that monthly payment:
- A client asks why dividends from her participating policy are not taxed like interest from a bank. The reason is that a dividend is:
- A universal life policyholder is choosing among the investment options inside her policy. She should understand that:
Practice the whole Life Insurance module
Timed sets weighted like the exam, and review of every question you miss. Free to start.