CLU Insurance and Risk Management Questions and Answers — Questions and Answers
Question 1: A financial planner is advising a client who is the sole proprietor of a successful consulting firm. The client is concerned about the financial impact a premature death would have on her family's ability to meet their long-term goals. The planner's recommendation to purchase a life insurance policy is an example of which risk management technique?
- Risk Avoidance
- Risk Retention
- Risk Reduction
- Risk Transfer (Correct answer)
Correct answer: Risk Transfer
Risk transfer is a core principle of insurance. By paying a premium, the client transfers the financial risk of premature death from her family to the insurance company, which contractually agrees to pay a death benefit.
Question 2: Insurers are generally unwilling to issue policies that cover losses resulting from acts of war. This is primarily because such an event violates which characteristic of an ideally insurable risk?
- The loss must be definite and measurable.
- There must be a large number of homogeneous exposure units.
- The loss should not be catastrophic. (Correct answer)
- The loss must be fortuitous or accidental.
Correct answer: The loss should not be catastrophic.
A catastrophic loss is one that could affect a large portion of an insurer's policyholders at the same time, potentially leading to the insurer's insolvency. War is a prime example of a catastrophic event that insurers avoid because the widespread, simultaneous losses would be financially unmanageable.
Question 3: A life insurance policy is referred to as a 'contract of adhesion' because it is offered on a 'take-it-or-leave-it' basis. What is the primary legal consequence of this classification when a dispute arises over ambiguous policy language?
- Any ambiguity is interpreted against the insurer, who drafted the contract. (Correct answer)
- The policyowner is presumed to have understood all terms upon acceptance.
- The contract is automatically voided, and all premiums are returned.
- The court will require the parties to enter into mandatory arbitration.
Correct answer: Any ambiguity is interpreted against the insurer, who drafted the contract.
Because the insurer drafts the contract and the insured has no opportunity to negotiate the terms, courts apply the principle of 'contra proferentem.' This means any vague or ambiguous language will be construed in the manner most favorable to the party who did not write the contract—the policyowner.
Question 4: An individual owns a Universal Life insurance policy with a specified face amount of $750,000 and has selected Death Benefit Option B. The policy currently has an accumulated cash value of $125,000. If the insured dies today, what will be the total death benefit paid to the beneficiary?
- $750,000
- $875,000 (Correct answer)
- $625,000
- $125,000
Correct answer: $875,000
Universal Life Death Benefit Option B provides an increasing death benefit. The total payout to the beneficiary is the policy's specified face amount PLUS the accumulated cash value at the time of death. Therefore, the benefit would be $750,000 + $125,000 = $875,000.
Question 5: A successful architect is covered by a disability income policy that contains a 'true own-occupation' definition of disability. After a car accident, she is no longer able to draw architectural plans due to a nerve injury in her hand, but she is able to earn a significant income as a university professor. How will her disability policy most likely respond?
- She will be considered totally disabled and eligible to receive the full policy benefit. (Correct answer)
- She will be considered partially disabled because she can still work in another field.
- Her claim will be denied because her new income exceeds her previous income.
- Her benefits will be reduced by the amount of income she earns from teaching.
Correct answer: She will be considered totally disabled and eligible to receive the full policy benefit.
A 'true own-occupation' definition of disability states that the insured is considered totally disabled if they are unable to perform the material and substantial duties of their specific occupation, even if they are gainfully employed in another occupation. Since she cannot perform her duties as an architect, she is entitled to full benefits regardless of her teaching income.
Question 6: Dr. Chen is the sole practitioner in her medical practice. She is worried that if a serious illness prevents her from working for an extended period, she will be unable to pay for her office rent, staff salaries, and medical supply bills, forcing her to close the practice. Which type of insurance is specifically designed to cover these ongoing business costs?
- Key Person Disability Insurance
- Business Overhead Expense (BOE) Insurance (Correct answer)
- Individual Disability Income Insurance
- A Disability Buy-Out Policy
Correct answer: Business Overhead Expense (BOE) Insurance
Business Overhead Expense (BOE) insurance is specifically designed to reimburse a business for eligible, ongoing expenses if the owner becomes disabled. It covers costs like rent, utilities, and non-owner employee salaries, but not the owner's own lost income. Individual Disability Income insurance is what would cover Dr. Chen's personal lost earnings.
CLU Insurance and Risk Management Questions and Answers
A financial planner is advising a client who is the sole proprietor of a successful consulting firm.
The client is concerned about the financial impact a premature death would have on her family's ability to meet their long-term goals.
The planner's recommendation to purchase a life insurance policy is an example of which risk management technique?