LLQP Life Insurance · Component 2.1 · 30% of the exam
The policy reserve in a whole life policy is:
- AThe commission paid to the agent over the first years of the policy, recovered from the client's premiums
- BAn extra fee charged to the client on top of the premium, to fund the insurer's guarantee of the death benefit
- CThe dividend declared each year from the insurer's surplus and credited to the policy's value
- The amount set aside from level premiums in early years to fund the higher cost of insurance later; it underlies the cash value
Correct answer: D) The amount set aside from level premiums in early years to fund the higher cost of insurance later; it underlies the cash value
Because a level premium overpays the true cost of insurance when the insured is young and underpays it when old, the surplus is held as a reserve. The cash surrender value the policyholder can access is derived from that reserve.
Why the other options are wrong
- ACommission is an expense, not a reserve.
- BThe reserve is built from the premium the client already pays.
- CDividends are a distribution of surplus, not the reserve.
Exam tip
Level premiums overpay early and underpay late; the reserve holds the early overpayment and is the source of cash value.
Common mistake
Thinking cash value is a separate savings account added on top of the premium.
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.