CLU Individual Life Insurance 4

Question 1

A modified premium whole life policy charges lower premiums in the early years and higher premiums later. How does its cash value accumulation compare to a standard whole life policy?

Accepted Answer

Cash value accumulation is slower in the early years but catches up over time

Answer

Because early premiums are lower in modified whole life, less money funds the reserve initially, causing slower early cash value growth, though it typically converges with standard whole life values in later years.

Question 2

What distinguishes variable universal life (VUL) from traditional universal life insurance?

Accepted Answer

VUL invests cash value in separate account subaccounts with market risk borne by the policyowner

Answer

VUL directs cash value into separate account subaccounts (stocks, bonds, money market) where investment gains are not guaranteed and the policyowner assumes all market risk.

Question 3

Under the IRC Section 7702 corridor test, what happens if a life insurance policy's cash value exceeds the limit relative to the death benefit?

Accepted Answer

The insurer must increase the death benefit to maintain corridor compliance

Answer

To comply with IRC 7702's corridor requirement, if cash value grows too large relative to the death benefit, the insurer must increase the death benefit proportionally to keep the policy classified as life insurance.

Question 4

Which of the following best describes a modified endowment contract (MEC)?

Accepted Answer

A policy that fails the 7-pay test and loses favorable tax treatment on withdrawals and loans

Answer

A MEC is a life insurance contract that fails the 7-pay test under IRC 7702A; loans and withdrawals are taxed as income first (LIFO) and subject to a 10% penalty before age 59½.

Question 5

An insured dies during the grace period before paying the overdue premium. How does the insurer typically handle the claim?

Accepted Answer

The full death benefit is paid, and the overdue premium is deducted from the proceeds

Answer

If death occurs during the grace period, the insurer pays the full death benefit minus the unpaid premium, because coverage remains in force during the grace period.

CLU - Chartered Life Underwriter Practice Test

CLU - Chartered Life Underwriter Practice Test

CLU Individual Life Insurance 4