CLU Individual Life Insurance 2 — Questions and Answers
Question 1: Which provision in a life insurance policy allows the insured to restore a lapsed policy within a specified period by paying overdue premiums plus interest?
- Reinstatement provision (Correct answer)
- Grace period clause
- Automatic premium loan
- Extended term option
Correct answer: Reinstatement provision
The reinstatement provision allows a policyholder to restore a lapsed policy, typically within 3-5 years, by paying all overdue premiums with interest and providing evidence of insurability.
Question 2: A universal life insurance policy's cash value is credited with interest based on which of the following?
- The S&P 500 index performance
- Current interest rates declared by the insurer (Correct answer)
- A fixed rate guaranteed at policy issue
- The policy's mortality charges only
Correct answer: Current interest rates declared by the insurer
Universal life policies credit cash value with current interest rates declared periodically by the insurer, which must meet a contractually guaranteed minimum rate.
Question 3: Under the incontestability clause, after what period can an insurer generally NOT contest a life insurance policy for misrepresentation?
- 6 months
- 1 year
- 2 years (Correct answer)
- 5 years
Correct answer: 2 years
Most states require that life insurance policies become incontestable after 2 years, meaning the insurer cannot void the policy for misrepresentation after that period, except in cases of fraud.
Question 4: Which nonforfeiture option provides the original face amount of coverage but for a shorter period than the original policy term?
- Cash surrender value
- Reduced paid-up insurance
- Extended term insurance (Correct answer)
- Paid-up additions
Correct answer: Extended term insurance
Extended term insurance uses the cash value to purchase term insurance equal to the original face amount but for a shorter duration determined by the accumulated cash value.
Question 5: A policyowner names a revocable beneficiary. Which statement correctly describes the policyowner's rights?
- The policyowner needs beneficiary consent to take a policy loan
- The policyowner can change the beneficiary without the beneficiary's consent (Correct answer)
- The beneficiary has a vested interest that cannot be altered
- The policyowner must notify the insurer 30 days before changing beneficiaries
Correct answer: The policyowner can change the beneficiary without the beneficiary's consent
With a revocable beneficiary designation, the policyowner retains full control and may change the beneficiary at any time without obtaining the beneficiary's consent.
Question 6: What is the primary purpose of the spendthrift clause in a life insurance policy?
- To limit the insurer's investment risk
- To prevent beneficiaries from assigning or pledging their interest to creditors (Correct answer)
- To restrict the policyowner from surrendering the policy
- To allow installment payments to the insurer
Correct answer: To prevent beneficiaries from assigning or pledging their interest to creditors
The spendthrift clause protects proceeds held by the insurer under a settlement option from being attached by the beneficiary's creditors or assigned away.
Question 7: Which type of life insurance policy combines a decreasing term rider with a whole life base to keep the total death benefit level while the premium remains constant?
- Variable life
- Return of premium term
- Economatic policy (Correct answer)
- Modified whole life
Correct answer: Economatic policy
The economatic policy uses dividends to purchase one-year term insurance, keeping the total death benefit constant as the whole life base grows, all at a level premium.
CLU Individual Life Insurance 2
Which provision in a life insurance policy allows the insured to restore a lapsed policy within a specified period by paying overdue premiums plus interest?