Free LLQP Life Insurance Practice Questions: Needs Analysis

Use this focused LLQP Life Insurance page as a short practice test for Needs Analysis. The items are original Finance Prep sample exam questions built for LLQP-style scenario judgment, not trivia, puzzle questions, official LLQP questions, copied live-exam content, or exam dumps.

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Sample questions

These are original Finance Prep practice questions aligned to this LLQP competency area. They are not official LLQP questions, copied live-exam content, or exam dumps. Use them to preview question style and explanation depth before continuing with topic drills, mixed sets, and timed mock exams in Finance Prep.

Question 1

Topic: Assess the Client’s Needs and Situation

Milan, age 42, smokes and does recreational scuba diving a few times a year. He applies for a $1,000,000 20-year term policy and says the purpose is to create cash at death to help pay outstanding debts.

He has $25,000 in a high-interest savings account, $180,000 in a TFSA invested in publicly traded ETFs, $450,000 of equity in his principal residence, and a $320,000 mortgage with 22 years remaining.

For financial underwriting and needs-at-death analysis, which asset is most likely considered illiquid (not readily available as immediate cash at death)?

• A. $25,000 in a high-interest savings account
• B. $180,000 in a TFSA invested in publicly traded ETFs
• C. The outstanding $320,000 mortgage with 22 years remaining
• D. $450,000 of equity in his principal residence

Best answer: D

What this tests: Needs Analysis

Explanation: When estimating capital needs at death (and when an insurer assesses whether an amount of coverage is justified), it matters whether the estate or survivors will have cash available right away.

• Liquid assets are those that can be converted to cash quickly with minimal barriers (for example, bank deposits or marketable securities).
• Illiquid assets may have substantial value, but are harder to turn into cash quickly (for example, real estate equity), especially if selling or borrowing against the asset takes time or depends on approvals.

In Milan’s case, the stated need is debt-related liquidity at death. The mortgage is a long-term obligation, and while the home has substantial equity, that equity is not typically available as immediate cash without a sale or financing arrangement. Therefore, the home equity is treated as illiquid for immediate needs-at-death purposes.

Home equity is usually illiquid because it generally requires selling the property or arranging financing to access cash, which may not be immediate at death.

Question 2

Topic: Assess the Client’s Needs and Situation

You are completing an individual life insurance application for an 8-year-old child, Mia. Mia’s mother, Lara, wants to own the policy and name herself to receive the death benefit if Mia dies. Lara’s mother, Jean, will pay the premiums from her own bank account.

What is the most appropriate next step to ensure the key parties to the contract are correctly identified on the application?

• A. List Jean as the policyowner because she is paying the premiums, and list Lara as beneficiary.
• B. List Lara as the policyowner, Mia as the life insured, Lara as the beneficiary, and Jean as the payor (premium payer), and obtain the required signatures/authorization for those roles.
• C. List Mia as the policyowner because she is the person being insured, and list Lara as beneficiary.
• D. Leave the payor section blank and note informally in the client file that Jean will pay the premiums.

Best answer: B

What this tests: Needs Analysis

Explanation: A life insurance contract has distinct parties, and correctly identifying them is a key early step in a compliant, accurate application process.

• Insurer: the insurance company issuing the policy and promising to pay the death benefit if the contract conditions are met.
• Policyowner: the person who applies for and controls the contract (e.g., can change beneficiaries, request policy changes, and is responsible for keeping premiums paid).
• Life insured: the person whose death triggers payment of the death benefit.
• Beneficiary: the person(s) or entity named to receive the death benefit.
• Payor (premium payer): used when premiums are paid by someone other than the policyowner; this should be recorded as part of accurate application completion.

In this scenario, Lara is the applicant and wants contractual control, Mia is the insured, Lara is to receive the proceeds, and Jean is simply funding the premiums. The correct workflow step is to document each role accordingly and obtain the appropriate signatures/authorizations for the application and payment arrangements.

This correctly identifies the parties based on the scenario: the policyowner controls the contract, the life insured is the person whose death triggers the benefit, the beneficiary receives the proceeds, and the payor is the person paying premiums when different from the owner.

Question 3

Topic: Assess the Client’s Needs and Situation

Which statement best describes how a permanent life insurance policy’s cash value and adjusted cost basis (ACB) can affect a client’s decision to keep, surrender, or replace the policy?

• A. Surrendering a permanent policy can create a taxable policy gain if the cash surrender value exceeds the policy’s ACB; this potential tax cost should be considered before surrendering or replacing.
• B. The ACB of a permanent policy is the same as the policy’s death benefit, so it does not affect surrender or replacement decisions.
• C. If a policy has any cash value, the entire cash surrender value is always taxable when the policy is surrendered or replaced.
• D. Cash values are always paid out tax-free on surrender, so ACB does not matter when deciding whether to keep or replace a policy.

Best answer: A

What this tests: Needs Analysis

Explanation: Cash value in a permanent life insurance policy can create both flexibility and tax consequences. When a client considers surrendering a policy (or replacing it, which often involves surrendering or otherwise disposing of the existing contract), the advisor should flag that the amount received may not be fully tax-free.

At a high level, the adjusted cost basis (ACB) is a tax measure used to determine whether a taxable policy gain arises when the policy is surrendered or otherwise disposed of. If the client receives an amount that is greater than the policy’s ACB, there may be a taxable gain. This is one reason clients sometimes keep an older policy with significant tax-deferred buildup rather than surrendering it, especially if the replacement does not clearly improve suitability after considering all costs and risks.

Practical implications for advice (high-level):

• Keeping the policy may avoid triggering tax that could occur on surrender.
• Surrendering may provide cash, but can also create an immediate tax cost if the surrender value is above ACB.
• Replacing should consider whether the existing policy’s cash value and tax position (including ACB) make surrendering expensive, in addition to non-tax factors (new underwriting, loss of guarantees, new exclusions/limitations, etc.).

A policy gain is generally possible on surrender (or certain dispositions) when the value received is greater than the policy’s ACB, so tax impact is a key consideration.

Question 4

Topic: Assess the Client’s Needs and Situation

During a first needs-analysis meeting, Jordan (age 38) says: “I live with my common-law partner, and we’re raising my 9-year-old son. My partner’s 20-year-old daughter is in school and lives with us part-time. My mom also moved in last year and I help cover her expenses.”

Before discussing an insurance amount or product type, what is the most appropriate next step for the agent?

• A. Clarify who is financially dependent on Jordan, the type/extent of support provided, and how long each dependency is expected to continue.
• B. Recommend a level term policy sized to replace Jordan’s income until the youngest child turns 18.
• C. Request medical evidence (e.g., paramedical exam) to confirm Jordan’s insurability before doing a needs analysis.
• D. Begin the life insurance application and collect the initial premium to secure coverage as quickly as possible.

Best answer: A

What this tests: Needs Analysis

Explanation: This scenario tests early-stage fact-finding: identifying dependents and the nature of ongoing dependency relationships (spouse/common-law partner, minor children, adult dependents, and caregiving relationships).

Not everyone living in the household is automatically a “dependent” for life insurance planning. The agent must confirm:

• Whether each person relies on Jordan financially (and for what: housing, food, tuition, care costs).
• Whether the support is occasional or ongoing.
• How long the dependency is expected to last (e.g., until a child finishes school, for the parent’s lifetime, or for a limited caregiving period).

Only after clarifying these relationships can the agent reasonably estimate income replacement needs, decide on a suitable coverage period (temporary vs permanent), and prioritize affordability.

Identifying true dependents and ongoing dependency relationships is essential fact-finding before estimating income replacement or other coverage needs.

Question 5

Topic: Assess the Client’s Needs and Situation

In most employer-sponsored group life insurance plans, what typically happens if an employee leaves the employer and does not take any action to continue the coverage?

• A. The group life coverage continues until the end of the calendar year as long as the employee was covered at any point during that year.
• B. The group life coverage becomes paid-up for a reduced amount based on years of service.
• C. The group life coverage automatically becomes an individual policy with the same face amount and premiums, with no paperwork required.
• D. The group life coverage usually terminates when employment ends, and no death benefit is payable for a death occurring after termination.

Best answer: D

What this tests: Needs Analysis

Explanation: A common limitation of employer group life insurance is that eligibility is linked to employment status. When employment ends, the employee generally stops being part of the eligible group, so the coverage ends. This is why an advisor must confirm key group-plan details during fact-finding, including when coverage ends (for example, last day worked, end of the month, end of paid premiums), whether any conversion privilege exists, and who the beneficiary is.

At the LLQP level, the durable takeaway is: group life is often temporary and not portable unless the plan offers a conversion or continuation option that the client must actively use.

Group life is commonly tied to active employment. If the insured leaves and does not continue coverage (for example, by converting), the coverage generally ends and there is no claim for a later death.

Question 6

Topic: Assess the Client’s Needs and Situation

Alicia (36) and Mark (38) have two children (ages 3 and 6) and a $520,000 mortgage. They ask you to “just quote $750,000 of term insurance” to protect the family if one of them dies. You have their incomes and debts, but you have not gathered their ongoing household spending or future costs (childcare/education). What is the most appropriate next step before recommending an amount of insurance?

• A. Complete an expense-based needs worksheet with them to summarize current monthly household expenses and identify future costs (e.g., childcare/education), then use it to estimate the income-replacement need.
• B. Use a rule of thumb (e.g., 10 times income) to recommend a coverage amount without collecting expense details.
• C. Proceed with a $750,000 term application immediately and plan to review affordability and needs after the policy is issued.
• D. Ask the insurer’s underwriter to suggest an appropriate coverage amount based on the clients’ ages and mortgage balance.

Best answer: A

What this tests: Needs Analysis

Explanation: This question tests the fact-finding workflow needed to support an evidence-based life insurance needs analysis.

When clients request a specific amount of coverage, the advisor still needs to confirm that the amount is suitable. A practical way to do that is to collect and summarize:

• Current household expenses (housing, food, utilities, transportation)
• Debt servicing (mortgage, loans, credit cards)
• Future costs that may continue or increase after death (childcare, education goals)

Once these expenses are known, you can estimate how much income would need to be replaced and for how long, and then compare that to existing coverage and the client’s budget. Skipping this step can result in over-insurance (affordability problems) or under-insurance (coverage gaps).

A defensible needs analysis starts with documenting what the surviving family must pay for now and later. Without expense and future-cost details, any coverage amount is guesswork.

Question 7

Topic: Assess the Client’s Needs and Situation

In a life insurance needs analysis, why does the insurance advisor collect and summarize the client’s current and future expenses (e.g., household costs, debt servicing, education costs, business expenses)?

• A. To estimate the amount and duration of life insurance needed to replace income and fund obligations if the insured dies
• B. To determine whether the client will qualify medically for insurance and what evidence of insurability will be required
• C. To decide who should be named beneficiary so that proceeds bypass probate and avoid taxes
• D. To calculate the policy’s expected investment performance and compare dividend scales or crediting rates

Best answer: A

What this tests: Needs Analysis

Explanation: A life insurance needs analysis starts with understanding what money would be required if the insured died. Collecting and summarizing current and future expenses supports an evidence-based estimate of:

• Ongoing lifestyle needs (housing, food, utilities, childcare)
• Debt servicing and payoff needs (mortgage, loans)
• Time-limited goals (children’s education)
• Business continuity needs (if the client is a business owner and the business depends on them)

These expense figures help the advisor translate the client’s situation into an appropriate coverage amount and coverage duration (for example, temporary needs may align with term coverage; permanent needs may suggest permanent coverage).

Expenses drive the cash-flow need after death (income replacement) and help quantify time-limited needs like debt repayment or education funding.

Question 8

Topic: Assess the Client’s Needs and Situation

Raj lends his friend Jenna $45,000 (CAD) with a written loan agreement. Raj wants to apply for a life insurance policy on Jenna and name himself beneficiary to protect against the financial loss if Jenna dies before repaying. Raj estimates another $5,000 would be needed to cover unpaid interest and collection/legal costs.

Based on insurable interest at the time of application/issue, what is the maximum face amount that would generally be supported for this purpose?

• A. $0
• B. $100,000
• C. $50,000
• D. $45,000

Best answer: C

What this tests: Needs Analysis

Explanation: Insurable interest means the applicant/policyowner must have a valid financial or close family relationship such that they would suffer a real loss (or loss of support) if the insured dies. For life insurance, insurable interest must exist at the time of application/issue; otherwise, the contract can be treated as an improper “wager” on someone’s life and may be unenforceable.

In a creditor–debtor situation, the insurable interest is generally limited to the creditor’s financial exposure at issue. Here, Raj’s exposure is the loan balance plus related costs he reasonably expects to lose if Jenna dies before repayment.

The single calculation is:

• $45,000 (loan) + $5,000 (interest/legal costs) = $50,000

In a creditor–debtor situation, insurable interest is generally limited to the amount of the financial loss at issue: $45,000 loan + $5,000 related costs = $50,000. Having insurable interest at issue helps support the policy’s validity and avoids a “wagering” contract.

Question 9

Topic: Assess the Client’s Needs and Situation

Jordan, age 38, is applying for life insurance. He is a non-smoker, works as an office manager, and occasionally travels to the U.S. for work. His main goal is to ensure his spouse can pay off their mortgage if he dies. The mortgage has 17 years remaining on the amortization, and he wants coverage that matches this obligation as closely as practical. Which term length is most appropriate?

• A. 10-year term life
• B. 30-year term life
• C. 20-year term life
• D. 15-year term life

Best answer: C

What this tests: Needs Analysis

Explanation: A common way to choose an appropriate term length is to match the coverage period to the duration of a specific temporary need, such as a mortgage, child-support obligation, or a business loan.

Here, Jordan’s stated purpose is mortgage payoff, with 17 years remaining. In practice, an advisor typically selects the term that covers the full remaining obligation, often rounding up to the nearest available term length (since policies are usually offered in standard term durations such as 10, 15, 20, 25, or 30 years).

A 20-year term best aligns with a 17-year remaining mortgage by covering the full obligation period and providing a small buffer if the payoff takes longer than expected.

Question 10

Topic: Assess the Client’s Needs and Situation

Marie, age 62, was recently widowed. She expects her spouse’s workplace pension will stop and asks what government benefits might be available while she decides how much life insurance she needs for survivor income. When discussing Old Age Security (OAS) and the Allowance for the Survivor, which statement is INCORRECT?

• A. The Allowance for the Survivor is automatically payable to any widow or widower once they turn 60, regardless of income, and it continues for life.
• B. To avoid overstating survivor income, you should confirm eligibility and treat OAS-related benefits as conditional in the needs analysis until they are verified.
• C. OAS is not a survivor benefit; you should not assume the surviving spouse will continue receiving the deceased person’s OAS payments.
• D. Because Marie is between ages 60 and 64, it may be relevant to explore whether she could qualify for the Allowance for the Survivor, depending on her circumstances.

Best answer: A

What this tests: Needs Analysis

Explanation: In survivor-income planning, government benefits can affect the size of the income gap that life insurance may need to cover. At a high level:

• OAS is not a survivor benefit. It is paid to an eligible individual (typically starting at age 65) and generally ends at death, so it should not be treated as income that “continues” to the surviving spouse.
• Allowance for the Survivor can be relevant for ages 60–64, but it is not automatic and is income-tested. Because eligibility depends on the survivor’s circumstances, an advisor should confirm whether it applies before relying on it in the needs analysis.

This question tests identifying a common planning mistake: overstating survivor income by assuming government benefits are guaranteed, transferable, or lifelong when they are not.

This is incorrect. The Allowance for the Survivor is income-tested and not automatic; it is also not a lifetime benefit (it is generally intended to bridge to age 65).

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Related focused pages

• Free LLQP Life Insurance Practice Exam
• LLQP Life Insurance: Product Analysis
• LLQP Life Insurance: Recommendation Implementation
• LLQP Life Insurance: In-Force Service

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