CLU Life Insurance Legal Aspects Questions and Answers — Questions and Answers
Question 1: An individual is seeking to purchase a life insurance policy on her former business partner, from whom she formally and financially separated five years ago. The insurance company denies the application. What is the most likely legal reason for this denial?
- The incontestability period has expired.
- The applicant lacks an insurable interest in the proposed insured. (Correct answer)
- The proposed insured is over the maximum age of issue.
- The policy would be considered a Modified Endowment Contract (MEC).
Correct answer: The applicant lacks an insurable interest in the proposed insured.
Insurable interest is a fundamental legal principle in life insurance, requiring that the policyowner would suffer a genuine financial or emotional loss upon the death of the insured. This interest must exist at the time the policy is issued. Since the business and financial relationship ended five years prior, the applicant likely no longer has a demonstrable financial interest in her former partner's life.
Question 2: A policyowner's permanent life insurance policy lapsed four months ago due to non-payment. The policyowner now wishes to put the policy back in force. Which policy provision outlines the conditions he must meet, and what is a primary requirement?
- Grace Period provision; payment of the most recent premium.
- Nonforfeiture Options; selection of Reduced Paid-Up insurance.
- Reinstatement provision; providing evidence of insurability. (Correct answer)
- Incontestability clause; waiting for a two-year period to pass.
Correct answer: Reinstatement provision; providing evidence of insurability.
The Reinstatement provision allows a policyowner to restore a lapsed policy. To do so, the owner must typically pay all back premiums plus interest, repay any outstanding loans, and provide evidence of insurability to the insurer. The grace period would have expired after about 31 days, and nonforfeiture options apply when a policy is surrendered, not reinstated.
Question 3: A policyowner wants to ensure that upon her death, the life insurance proceeds paid to her beneficiary will be protected from the beneficiary's creditors. Which policy provision or arrangement would best accomplish this goal?
- An irrevocable beneficiary designation.
- The Automatic Premium Loan provision.
- An Absolute Assignment of the policy.
- A Spendthrift Clause. (Correct answer)
Correct answer: A Spendthrift Clause.
A Spendthrift Clause protects the policy proceeds from the claims of the beneficiary's creditors. It does this by giving the insurance company the right to hold the proceeds and pay them out to the beneficiary in installments, rather than a lump sum. Creditors generally cannot compel the insurer to pay them directly from the policy proceeds held by the company.
Question 4: An employee has been covered under her employer's group life insurance plan for seven years. Her employment is terminated, and she wants to continue her life insurance coverage. Which of the following accurately describes her rights under the typical conversion privilege?
- She can convert to an individual term policy of the same face amount by providing evidence of insurability.
- She must convert her coverage within 90 days, and the premium will be the same as her group rate.
- She can convert to an individual permanent policy for an amount up to the group coverage amount without proving insurability. (Correct answer)
- She can continue the exact same group coverage indefinitely by paying the premiums directly to the insurer.
Correct answer: She can convert to an individual permanent policy for an amount up to the group coverage amount without proving insurability.
The group life conversion privilege allows a departing employee to convert their group coverage to an individual permanent life insurance policy (e.g., whole life) without providing evidence of insurability. The conversion must typically be done within 31 days of termination, and the amount of coverage cannot exceed the amount the employee had under the group plan.
Question 5: Which of the following statements best distinguishes a viatical settlement from a life settlement from a legal and regulatory standpoint?
- Viatical settlements are only available for term policies, while life settlements are for permanent policies.
- Life settlements involve selling a policy to the original insurer, whereas viatical settlements involve a third-party company.
- A viatical settlement is legally defined by the insured having a terminal or chronic illness, often with a life expectancy of 24 months or less. (Correct answer)
- Only viatical settlements are regulated by state insurance departments; life settlements are unregulated.
Correct answer: A viatical settlement is legally defined by the insured having a terminal or chronic illness, often with a life expectancy of 24 months or less.
The primary legal and defining difference between a viatical and a life settlement is the health status of the insured. A viatical settlement involves an insured who is terminally or chronically ill, typically with a life expectancy of two years or less. A life settlement is for a policyowner (usually a senior) who is not terminally ill but wishes to sell their policy.
Question 6: Upon the insured's death, the insurance company discovers that the insured's age was understated by five years on the application. The policy has been in force for 15 years. According to the Misstatement of Age provision, how will the insurer handle the death claim?
- The policy will be voided due to material misrepresentation, and all premiums will be refunded.
- The death benefit will be reduced to the amount the premiums paid would have purchased at the correct age. (Correct answer)
- The full death benefit will be paid, but the beneficiary must pay all past-due premium shortages.
- The claim will be denied because the contestability period has not yet expired for age misstatements.
Correct answer: The death benefit will be reduced to the amount the premiums paid would have purchased at the correct age.
The Misstatement of Age provision states that if the insured's age is found to be incorrect, the insurer will not void the policy but will adjust the death benefit. The benefit paid will be the amount that the actual premiums would have purchased had the correct age been stated on the application. This provision applies throughout the life of the policy and is an exception to the incontestability clause.
CLU Life Insurance Legal Aspects Questions and Answers
An individual is seeking to purchase a life insurance policy on her former business partner, from whom she formally and financially separated five years ago.
The insurance company denies the application.
What is the most likely legal reason for this denial?