LLQP Life Insurance · Component 1.3 · 35% of the exam
Why does inflation increase the amount of life insurance a family needs?
- AIt does not; insurance benefits are indexed to inflation by law, so the amount purchased today keeps its value
- BBecause insurers deduct an inflation allowance from claims paid many years after the policy was issued
- CBecause premiums rise with inflation each year, so the client must buy more coverage to offset the added cost
- Because the survivors' future expenses will rise, so more capital is needed to maintain the same standard of living
Correct answer: D) Because the survivors' future expenses will rise, so more capital is needed to maintain the same standard of living
A fixed death benefit buys less each year. A needs analysis that projects income needs over 20 years must either index the income target or use a real (inflation-adjusted) rate of return. Ignoring inflation quietly under-insures the family.
Why the other options are wrong
- ADeath benefits are fixed unless an indexing rider is bought.
- BInsurers do not deduct inflation from claims.
- CPremiums on level products do not rise with inflation.
Exam tip
Either index the target income or use a real rate of return; ignoring inflation over a 20-year horizon can halve the family's real protection.
Common mistake
Projecting today's expenses unchanged over the survivors' whole period of need.
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.