learnedly.

LIFE LICENCE QUALIFICATION PROGRAM (LLQP)

LLQP Module:
Life Insurance

Chapter 11:
RECOMMENDING AN INSURANCE POLICY

The Learnedly® Study Notes are NOT intended to replace the CISRO Life
License Qualification Program Exam Preparation Manual.

The Learnedly® study notes are based on the CISRO/OCRA Life Licence Qualification Program (LLQP)
Exam Preparation Manual, 10th Edition, 2024.
LLQP Study Notes Module: Life Insurance

Chapter 11:
RECOMMENDING AN INSURANCE POLICY

11.1 Evaluate the probability, severity and duration of risks

• When doing any type of insurance needs analysis, it is important to first assess
the probability, severity and duration of the risk
• Each person will have a different risk matrix and it will evolve over time

11.1.1 Probability of death

• The life agent should be able to explain that an individual’s risk of death is
based on a number of factors

[Link] Current age and gender

• Age and gender are key factors in determining life expectancy and probability
of death.
• Statistics show that the odds of dying increase with age for both males and
females.
• Females generally have lower odds of dying than males until age 100.
• Insurer mortality tables reflect women's longer life expectancy.

©2025 Learnedly Canada Inc. Page 2 of 12

LLQP Study Notes Module: Life Insurance

[Link] Personal and family health history

• Personal and family health history is a contributing factor to the risk of death
• If the person has a history of health problems or family health problems, his
probability of death is likely higher than the average Canadian

[Link] Lifestyle risks

• A person’s lifestyle choices can also influence his probability of death, such as:
o Smoking
o Having a stressful job
o Drinking excessively
o A history of driving infractions
o Frequent travel, particularly to developing countries
o Engaging in hazardous activities or hobbies
• Lifestyle risks increase the odds of dying

11.1.2 Financial impacts of death

• The biggest financial impacts of death typically relate to:
o The cost of replacing a caregiver
o The need to repay debts, including a mortgage or a personal loan
o Income taxes that result from the deemed disposition of property at
death
o Change to savings plan for children’s education and survivor’s retirement
o Change to lifestyle

11.1.3 Duration of risk

• The life agent needs to determine how long the client’s risk of death will be a
concern from a financial standpoint
• The financial impacts associated with that death may only present a problem for
a short or specific period of time

11.1.4 Other risks

• The agent should consider other risks to which the client may be exposed, other
than the risk of death

[Link] Risk of illness or disability

©2025 Learnedly Canada Inc. Page 3 of 12

LLQP Study Notes Module: Life Insurance

• The risk of becoming disabled for a period of three months or longer is

significantly higher than the risk of death for all age groups
• Disability can have as great an impact on family finances as death
• Waiver of premium benefit, or a dread disease rider may help keep the policy in
force if he becomes ill and is unable to earn an income

[Link] Risk of unemployment

• The agent should try to ascertain the stability of the client’s income, to ensure
that he will have adequate cash flow to pay the required premiums
• If income fluctuates from year to year, a universal life (UL) policy may be
appropriate

11.2 Insurance needs analysis – Income replacement approach

• Income replacement approach is reflected by the loss of employment income
that would result from the death of an income earner
• This approach strives to replace that lost income and assumes if income can be
replaced, the surviving family will not experience a reduction in their standard of
living

11.2.1 Capitalization of lost income

• Ensures that the income stream can be replicated in perpetuity
• Capitalization spreads expenses over time, like a mortgage, rather than paying
them upfront.
• Lost income capitalization converts future income into present value using the
formula: Capitalized value = annual income ÷ rate of return.
• Using a 5% rate of return, Derek’s lost income capitalization suggests a $2
million life insurance need.
• This approach preserves the capital (death benefit) and assumes income
generation perpetually through investment returns.

11.2.2 Impact of investment returns, inflation and income tax

• To protect against changing investment returns, a conservative interest rate
should be used, such as that available on GICs or other term deposits
• The approach so far fails to consider the impact of income taxes or inflation on
income

©2025 Learnedly Canada Inc. Page 4 of 12

LLQP Study Notes Module: Life Insurance

[Link] Accounting for income taxes

• Life insurance proceeds are tax-free, but investment income from those
proceeds is taxable.
• Lost income replacement calculations must align with tax treatment, using a net
interest rate for after-tax income.
• Marginal tax rates apply to small income amounts, while average tax rates are
used for larger income replacements.

[Link] Accounting for inflation

• The model also assumes that the income being replaced would be fixed over
time, when in reality an individual’s employment income usually increases over
time
• This can be addressed by using an inflation-adjusted rate of return

[Link] Accounting for income taxes and inflation simultaneously

• In reality, the capital needed will be affected by both income taxes and inflation
• The after-tax after inflation rate of return formula is provided in the text

11.2.3 Weaknesses of the income replacement approach

• The income replacement approach assumes interest income can replace lost
income but overlooks future income growth, inflation, and interest rate changes.
• It does not account for immediate financial needs, like paying off a mortgage, at
the time of death.
• Reliance on interest-only income may not satisfy beneficiaries, and using the
capital reduces its ability to generate perpetual income.

11.3 Insurance needs analysis – Capital needs approach

• It is usually more beneficial to take a capital needs approach:
o Identifies all of the income and capital needs arising as a result of death
o Converts needs to a capitalized amount at death
• This approach starts by listing the surviving family’s sources of income, then
comparing them with their expenses, to determine if a shortfall exists

©2025 Learnedly Canada Inc. Page 5 of 12

LLQP Study Notes Module: Life Insurance

11.3.1 Income earned by survivors

• Income earned by the surviving family will reduce the required death benefit
amount.

11.3.2 Ongoing expenses

• It is important to consider that certain expenses may:
o Increase E.g., childcare
o Decrease E.g., food, clothing
o Be unaffected E.g., home heating
o Be eliminated entirely E.g., golf membership

11.3.3 Income shortfall

• If the income is less than the expenses, then an income shortfall exists
• Income shortfall = expenses – income

[Link] Capitalization of income shortfall

• The next step is to determine the amount of capital that would be needed at
death to fund this shortfall in income
• There are two approaches that can be used:
o Capital retention method
▪ Capitalization of shortfall = annual shortfall ÷ investment return
▪ Investment return used in this formula should be the after-tax
inflation adjusted rate of return
o Capital drawdown method
▪ Multiply annual shortfall by the number of years the shortfall is
expected

11.3.4 Capital needs analysis

• The next step is to identify all of the other lump sum needs that may arise as a
result of death, to insure that the estate has enough liquidity to meet these
needs

[Link] Final expenses

• Final expenses: cost of providing burial, cremation, funeral or remembrance
services

©2025 Learnedly Canada Inc. Page 6 of 12

LLQP Study Notes Module: Life Insurance

[Link] Tax liabilities

• The deemed disposition of capital assets upon death and the de-registration of
registered assets can result in a significant tax liability for the year of death

[Link] Debt elimination

• A common objective in a life insurance needs analysis is to ensure that the
estate has sufficient liquidity to pay off all debts owing at the time of death

[Link] Estate expenses

• There are many expenses that could be incurred by an estate, such as:
o Probate fees
o Compensation for the executor or estate trustee
o Legal fees, dependent upon the estate’s needs
o Accounting fee for final tax return preparation
o Asset management fees
o Property maintenance fees, if the estate includes real estate

[Link] Emergency fund

• A common rule of thumb is that a family should have sufficient liquid assets in an
emergency fund to cover 3 to 6 months of regular expenses

[Link] Education fund

• The capitalized value of anticipated education expenses is often included in the
life insurance needs analysis

[Link] Estate equalization

• Insurance can be used to help equalize the distribution from a monetary
standpoint

[Link] Charitable bequests and legacies

• Often the life insured wants to provide for a charitable bequest upon death,
provide a legacy, set up a scholarship fund at his alma mater, etc.

[Link] Total capital needs

• Once all of the capital needs have been identified, including the capitalized
income shortfall, a total must be calculated

©2025 Learnedly Canada Inc. Page 7 of 12

LLQP Study Notes Module: Life Insurance

[Link] Assets available upon death

• To identify all of the assets that would be available upon death to meet estate
needs, only those assets that are already in the form of cash or cash equivalents,
or that the family is willing to sell to meet those estate needs, should be
included

[Link] Existing insurance

• A summary should be made of existing insurance, its term, premiums,
renewability and convertibility, CSV and ACB for permanent insurance

[Link] Shortfall
• The last step is to determine the shortfall in capital
• Capital shortfall = Total capital needs at death – available assets – existing life
insurance
• This shortfall represents the amount of additional insurance that should be
acquired

11.4 Bringing it all together

• Agent should be in a good position to determine if life insurance is needed, and
to evaluate options that might be suitable for the client

11.4.1 Duration of risk

• Duration of each of the capital needs helps determine whether permanent or
term insurance is required – if term, the duration of that term
• Among cases where the capital needs may be suited to term insurance:
o Need to pay off the mortgage with the insurance
o Children’s needs when most will eventually be financially independent
o Need to replace employment income
• Examples of capital needs more suited to permanent insurance include:
o Special needs children who may never outgrow their need for financial
support
o Tax liability that only arises upon death

©2025 Learnedly Canada Inc. Page 8 of 12

LLQP Study Notes Module: Life Insurance

11.4.2 Investment needs

• A whole life or UL insurance policy may offer additional tax deferral
opportunities

11.4.3 Cash flow vs. premiums

• Sometimes a trade-off will be needed between the ideal type or amount of
insurance, and the cash flow available to pay the premiums
• If cash flow is limited, it is unlikely the client will be able to afford permanent
insurance
• If income is expected to increase in the future, ensure that term insurance
includes a conversion option

11.4.4 Coverage for spouse or dependents

• May be an opportunity to cover additional family members under the same
policy:
o Some or all of the insurance could be done on a joint basis on both
spouses
o The spouse and/or children could be covered under a family life rider

11.5 Making the recommendation

• Once the life agent has compiled all information, he should be ready to assess
various life insurance options and develop a recommendation

11.5.1 Type of coverage

• The first step is to determine:
o The life or lives insured
o The type of coverage (term, whole life or UL)
o For term insurance, the appropriate term

11.5.2 Death benefits

• The agent must determine the benefit for each policy recommended

11.5.3 Premiums
• Premium quotes on the recommended coverage must be provided

11.5.4 Beneficiaries

©2025 Learnedly Canada Inc. Page 9 of 12

LLQP Study Notes Module: Life Insurance

• The agent may offer a recommendation on who should be named as beneficiary

[Link] Primary and contingent

• Primary beneficiaries will receive the death benefit if they survive the life insured
• Some examples include:
o If the funds are to be used to pay income taxes due upon death, the
estate may be an appropriate beneficiary
o If the funds are to be used to provide a replacement source of income to
the surviving family, then the spouse may be an appropriate beneficiary
o If the funds are to be used to support minor children, then a trustee
should be named to manage the funds until the children reach the age of
majority
• Note that it is possible to name more than one primary beneficiary
• Possible to allocate different amounts to each beneficiary (default is equal
amounts)

[Link] Revocable or irrevocable

• In most Canadian jurisdictions, beneficiary designations are automatically
revocable unless the application specifies otherwise
• In Quebec, however, if the policyholder designates his spouse as the
beneficiary, it is automatically irrevocable, unless the policyholder specifies that
it is revocable
• There are only a few situations to recommend an irrevocable beneficiary
designation:
o It is a requirement of a spousal or child support court order
o There is a need to protect the insurance proceeds from creditors
o It is being used to implement a tax strategy in connection with charitable
giving

[Link] Probate implications

• If the estate is named the beneficiary, the death benefit will be subject to
probate
• If the proceeds are to be used to pay income taxes or other amounts payable by
the estate, then the estate may still be the appropriate beneficiary

©2025 Learnedly Canada Inc. Page 10 of 12

LLQP Study Notes Module: Life Insurance

• When an estate is subject to probate, the contents and terms of the estate will
become public knowledge - increases the chance that someone might contest
the distribution

11.5.5 Highlighting important clauses

• Agent should ensure the policyholder is aware of, and understands, key
provisions
[Link] Exclusions
• For a policy with a specific exclusion, the agent should ensure that the
policyholder understands that the death benefit will not be paid for death upon
that excluded event
• Suicide - All policies have a 2-year exclusion period for deaths as a result of
suicide

[Link] Incontestability
• For the first 2 years of a life insurance contract, if the insurer discovers a material
mistake was made in the application for coverage, the insurance company has
the option of adjusting the premiums, adding exclusions or voiding the policy
• Once this 2-year contestability period has expired, the policy is said to be
incontestable
• After 2 years, the insurance company cannot cancel the policy for any reason
other than missed premiums, or fraudulent misrepresentation

[Link] Grace period

• All policies provide a grace period for premium payments, usually 30 or 31 days
after the date the premium is due
• As long as the policy premium is received by the insurance company within the
grace period, the policy will remain in force
• If the life insured dies during that grace period, the death benefit will still be
paid, but it will be reduced by the amount of the outstanding premium

[Link] Reinstatement
• Most life insurance contracts allow the reinstatement of a lapsed policy within 2
years of lapse - with proof of insurability and pay all missed premiums, plus
accrued interest

©2025 Learnedly Canada Inc. Page 11 of 12

LLQP Study Notes Module: Life Insurance

• Premiums on the reinstated policy will be based on the age of the life insured
when the policy was first issued or last renewed
• When a policy is reinstated, the 2-year contestability and suicide exclusion
periods apply from the date of the reinstatement

[Link] Right of rescission

• Right of rescission refers to the 10-day free-look period, which gives the
policyholder 10 days to review the policy after receipt of a new policy
• During this time, the policyholder can choose to return it to the insurance
company and he will receive a full refund of all premiums paid

[Link] Expiry
• Term policies have an inherent expiry date - coverage will cease at the end of
the term, unless the policy is renewable

[Link] Surrender charges

• For UL insurance policies, surrender charges may be applied if the policy is
cancelled or a partial withdrawal is made – usually apply during the early years
of the UL policies

11.6 Using illustrations

• Illustrations are commonly used to help the client understand the recommended
policy
• For permanent insurance policies, the illustrations are more complex - they
include projections of policy dividends, mortality deductions, investment
account values, etc.
• Agents must ensure that policyholders understand that the projections are not
predictions of future performance

©2025 Learnedly Canada Inc. Page 12 of 12