CLU Individual Life Insurance Planning 3 — Questions and Answers
Question 1: Which of the following best describes the waiver of premium rider?
- Premiums are waived if the insured loses employment
- Premiums are waived if the insured becomes totally disabled (Correct answer)
- The policy lapses without penalty if premiums are not paid
- Future premiums are reduced after the policy's 10th year
Correct answer: Premiums are waived if the insured becomes totally disabled
The waiver of premium rider keeps a policy in force by waiving premium payments if the insured becomes totally and permanently disabled, typically after a 6-month waiting period.
Question 2: In the needs analysis approach to life insurance planning, survivor income needs are calculated by:
- Multiplying the insured's salary by 10
- Subtracting available survivor resources from total financial obligations (Correct answer)
- Applying the human life value formula
- Using only Social Security survivor benefit estimates
Correct answer: Subtracting available survivor resources from total financial obligations
The needs analysis approach identifies all financial obligations (debts, income replacement, education, etc.) and subtracts existing resources to determine the coverage gap.
Question 3: What distinguishes a participating life insurance policy from a non-participating policy?
- Participating policies have no cash value
- Participating policies pay dividends that may reduce premiums or increase coverage (Correct answer)
- Non-participating policies are only sold by mutual companies
- Participating policies are only available through employers
Correct answer: Participating policies pay dividends that may reduce premiums or increase coverage
Participating policies entitle policyowners to receive dividends (a return of excess premium), which can be taken as cash, used to buy paid-up additions, or applied to premiums.
Question 4: Which policy provision protects a policyowner who accidentally misses a premium payment?
- Reinstatement provision
- Grace period provision (Correct answer)
- Automatic premium loan provision
- Spendthrift provision
Correct answer: Grace period provision
The grace period provision (typically 30-31 days) allows a policyowner to pay a past-due premium and keep the policy in force without a lapse.
Question 5: A client wants life insurance that will provide a death benefit AND accumulate cash value tied to a separate account invested in mutual funds. This describes:
- Whole life insurance
- Variable life insurance (Correct answer)
- Universal life insurance
- Indexed universal life insurance
Correct answer: Variable life insurance
Variable life insurance has a fixed death benefit (or variable in variable universal life) and a separate account where cash values are invested in sub-accounts similar to mutual funds.
Question 6: The reinstatement provision of a life insurance policy typically requires the policyowner to:
- Pay only future premiums going forward
- Provide evidence of insurability and pay back premiums with interest (Correct answer)
- Submit a new application as if applying for the first time
- Wait 5 years before reinstating the policy
Correct answer: Provide evidence of insurability and pay back premiums with interest
Reinstatement generally requires proof of continued insurability and payment of all overdue premiums with interest, usually within a set period (often 3-5 years) after lapse.
Question 7: A $1,000,000 survivorship (second-to-die) life insurance policy pays the death benefit:
- When the first insured dies
- When both insureds have died (Correct answer)
- Each time one of the two insureds dies
- After the surviving insured reaches age 65
Correct answer: When both insureds have died
Second-to-die (survivorship) life insurance pays the death benefit only after both insureds have died, making it popular for estate planning to cover estate taxes.
CLU Individual Life Insurance Planning 3
Which of the following best describes the waiver of premium rider?