LLQP Needs Analysis and Financial Planning 4 — Questions and Answers
Question 1: A 45-year-old client has a mortgage of $320,000, a car loan of $18,000, and no other debts. Her spouse earns $75,000/year and would need income replacement for 15 years. Using the DIME method, what component accounts for the mortgage balance?
- Income replacement
- Debt elimination (Correct answer)
- Mortgage payoff
- Education funding
Correct answer: Debt elimination
In the DIME method, Debt refers to all outstanding liabilities including the mortgage balance.
Question 2: Which of the following best describes a 'human life value' approach to determining life insurance needs?
- Calculating the present value of the insured's future net earnings (Correct answer)
- Adding all outstanding debts and final expenses
- Multiplying annual income by a fixed factor such as 10
- Estimating the cost of replacing domestic services
Correct answer: Calculating the present value of the insured's future net earnings
The human life value method discounts the insured's projected future net earnings to a present value to determine the economic loss survivors would suffer.
Question 3: A client wants to ensure his family can maintain their current lifestyle if he dies. After reviewing his financial data, the advisor determines existing assets and survivor income cover 60% of the need. The advisor should recommend a death benefit that covers:
- 100% of the identified need
- The remaining 40% gap (Correct answer)
- Only final expenses and debts
- 60% of current annual income
Correct answer: The remaining 40% gap
The needs analysis identifies the shortfall between the total financial need and existing resources, so insurance should cover only the gap.
Question 4: During a needs analysis, a client discloses she is a single parent with two children aged 8 and 10. Which financial planning priority is typically MOST urgent for this client?
- Retirement income planning
- Estate tax minimization
- Income replacement life insurance (Correct answer)
- Tax-sheltered investment accumulation
Correct answer: Income replacement life insurance
A single parent's top priority is ensuring income replacement so dependents are financially protected if the parent dies prematurely.
Question 5: When gathering financial data for a needs analysis, an advisor learns the client has a defined benefit pension that pays a survivor benefit of $1,200/month. How should this be treated in the analysis?
- Ignored because pension income is uncertain
- Added to existing resources that reduce the life insurance need (Correct answer)
- Treated as a liability because it creates tax obligations
- Excluded since it only applies during the client's lifetime
Correct answer: Added to existing resources that reduce the life insurance need
Survivor pension benefits represent existing resources that reduce the gap between total needs and what insurance must cover.
Question 6: A client asks why her advisor collects information about her children's ages and education plans during a needs analysis. The BEST reason is:
- To determine whether RESP contributions qualify for tax deductions
- To estimate future education funding needs as part of the total financial requirement (Correct answer)
- To confirm the client qualifies for a family life insurance discount
- To assess whether the children will inherit estate assets
Correct answer: To estimate future education funding needs as part of the total financial requirement
Children's ages and education plans help the advisor estimate future post-secondary education costs, which are included in the total needs calculation.
Question 7: A client has $500,000 of existing life insurance through his employer. His needs analysis reveals a total insurance need of $1.2 million. His advisor recommends an additional $700,000 personal policy. The client argues the employer coverage is sufficient. What is the advisor's BEST response?
- Agree, since group insurance is typically less expensive
- Explain that group coverage is usually not portable if employment ends (Correct answer)
- Suggest converting the employer policy to a personal policy immediately
- Recommend reducing the personal policy to $400,000 to match the gap
Correct answer: Explain that group coverage is usually not portable if employment ends
Employer-sponsored group life insurance is generally not portable, meaning the client could lose coverage if he changes jobs or is laid off.
LLQP Needs Analysis and Financial Planning 4
A 45-year-old client has a mortgage of $320,000, a car loan of $18,000, and no other debts.
Her spouse earns $75,000/year and would need income replacement for 15 years.
Using the DIME method, what component accounts for the mortgage balance?