CLU Individual Life Insurance 5

Question 1

Which life insurance ownership arrangement is typically used to keep the death benefit outside the insured's taxable estate under IRC Section 2042?

Accepted Answer

Irrevocable life insurance trust (ILIT)

Answer

An ILIT owns the policy so the insured has no incidents of ownership; proceeds are paid to the trust and excluded from the insured's gross estate under IRC Section 2042.

Question 2

Under a third-party ownership arrangement, who has the right to exercise policy options such as surrendering the policy?

Accepted Answer

The policyowner

Answer

In a third-party ownership situation, the policyowner — not the insured or beneficiary — holds all contractual rights including the right to surrender, borrow, or change beneficiaries.

Question 3

The misstatement of age provision in a life insurance policy most commonly results in which adjustment?

Accepted Answer

Death benefit adjusted to the amount the premium paid would have purchased at the correct age

Answer

When age is misstated, insurers adjust the death benefit to what the paid premiums would have purchased at the insured's true age, rather than voiding the policy.

Question 4

Which of the following is a characteristic of graded death benefit life insurance?

Accepted Answer

Full death benefit is paid only after a specified number of policy years if death is not accidental

Answer

Graded benefit policies — often issued on a guaranteed-acceptance basis — pay a limited benefit (often return of premiums plus interest) if the insured dies from natural causes in the first 2-3 policy years.

Question 5

A 'last survivor' (second-to-die) life insurance policy is most commonly used to fund which planning need?

Accepted Answer

Estate liquidity to pay federal estate taxes after the death of the surviving spouse

Answer

Second-to-die policies pay at the death of the last surviving insured, aligning perfectly with the estate tax liability that arises when the surviving spouse dies and the marital deduction is exhausted.

CLU - Chartered Life Underwriter Practice Test

CLU - Chartered Life Underwriter Practice Test

CLU Individual Life Insurance 5