CLU Individual Life Insurance Questions and Answers

Question 1

A client purchased a whole life insurance policy four years ago.
Two and a half years ago, he was diagnosed with a chronic illness that he did not disclose on his application.
If the client dies from this illness, which of the following policy provisions will prevent the insurer from denying the claim?

Accepted Answer

Incontestability clause

Answer

Misstatement of Age clause

Answer

Suicide clause

Answer

Grace Period provision

Question 2

An individual owns a participating whole life insurance policy. Which of the following is true regarding the taxation of dividends received from this policy?

Accepted Answer

Dividends are considered a return of premium and are generally not taxable until the total dividends received exceed the total premiums paid.

Answer

Dividends are always taxed as ordinary income in the year they are received.

Answer

Dividends can only be used to purchase paid-up additions and are taxed upon the surrender of these additions.

Answer

Dividends are taxed as capital gains, regardless of the amount of premiums paid.

Question 3

A policyowner with a significant cash value in their whole life policy is facing a financial hardship and can no longer afford the premium payments. They wish to maintain some level of death benefit coverage without further payments. Which Nonforfeiture Option would allow them to use the policy's cash value to purchase a smaller, fully paid-up policy of the same type?

Accepted Answer

Reduced Paid-Up Insurance

Answer

Cash Surrender Value

Answer

Extended Term Insurance

Answer

Automatic Premium Loan

Question 4

Which of the following statements accurately describes the tax treatment of distributions from a life insurance policy classified as a Modified Endowment Contract (MEC)?

Accepted Answer

Distributions, including policy loans, are taxed on a Last-In, First-Out (LIFO) basis, and a 10% penalty may apply to gains withdrawn before age 59 ½.

Answer

All distributions, including loans, are received tax-free.

Answer

Distributions are taxed on a First-In, First-Out (FIFO) basis, with the return of basis occurring first.

Answer

The death benefit becomes subject to income tax.

Question 5

A policyowner takes a loan against the cash value of their permanent life insurance policy. Which of the following is NOT a potential consequence of an outstanding policy loan?

Accepted Answer

The insurer will immediately report the loan amount to credit bureaus, impacting the policyowner's credit score.

Answer

The death benefit paid to beneficiaries will be reduced by the outstanding loan balance plus accrued interest.

Answer

If the loan plus interest exceeds the policy's cash value, the policy may lapse.

Answer

Interest accrues on the outstanding loan balance.

Question 6

An individual purchased a life insurance policy on March 1, 2024. If the insured commits suicide on May 15, 2025, how will the insurance company typically respond?

Accepted Answer

Deny the claim and refund all premiums paid without interest.

Answer

Pay the full death benefit to the beneficiary.

Answer

Pay a pro-rated death benefit based on the premiums paid.

Answer

Deny the claim and retain all premiums paid.