LLQP Life Insurance · Component 1.3 · 35% of the exam
The income replacement approach to needs analysis calculates:
- The lump sum required to fund the survivors' income for a chosen period, allowing for returns and inflation
- BThe client's salary multiplied by ten in every case, since that is the industry's accepted measure of income loss
- COnly the funeral and outstanding debts, since those are the amounts the family must pay immediately after the death
- DThe insurer's maximum issue limit for the client's age and income, which caps what can be recommended
Correct answer: A) The lump sum required to fund the survivors' income for a chosen period, allowing for returns and inflation
Income replacement asks how much capital, invested at an assumed after-tax return and drawn down against inflation, would replace the deceased's contribution to household income for the period needed. It is the core of most family needs analyses.
Why the other options are wrong
- BA fixed multiple of salary is a rule of thumb, not the income replacement method.
- CFuneral and debts are capital needs; income replacement is about ongoing income.
- DThe insurer's issue limit is an underwriting ceiling, not a needs calculation.
Exam tip
Income replacement = capital needed to fund a target income for a set period at an assumed after-tax, after-inflation return.
Common mistake
Confusing a salary multiple with a real income replacement 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.