CLU Individual Life Insurance Planning 4

Question 1

When a life insurance policy lapses and the policyowner selects the extended term nonforfeiture option, the result is:

Accepted Answer

A term policy for the original face amount for a period supported by the cash value

Answer

Extended term uses the cash value as a single premium to purchase term insurance for the original face amount, extended for as long as the cash value supports.

Question 2

Which of the following is an advantage of using life insurance cash value for retirement supplementation compared to a traditional IRA?

Accepted Answer

Policy loans from life insurance are generally income-tax-free

Answer

Policy loans from a properly structured life insurance contract are generally income-tax-free, whereas IRA withdrawals are typically taxable as ordinary income.

Question 3

Under the IRC Section 7702 definition of life insurance, what is the consequence of a policy becoming a Modified Endowment Contract (MEC)?

Accepted Answer

Loans and withdrawals become subject to income tax and a 10% penalty if taken before age 59½

Answer

A MEC is still life insurance, but distributions (loans and withdrawals) are treated as income-first (LIFO) and subject to a 10% penalty if taken before age 59½.

Question 4

A client names a minor child as sole beneficiary of a life insurance policy. What problem may arise at claim time?

Accepted Answer

A court-appointed guardian may be required to manage the funds until the child reaches majority

Answer

Minors cannot legally receive large sums directly, so a court-appointed guardian or custodian is typically required to manage the proceeds, which can be costly and slow.

Question 5

The concept of 'insurable interest' in life insurance requires that the policyowner:

Accepted Answer

Must have a financial or emotional stake in the continued life of the insured at policy inception

Answer

Insurable interest (a financial, business, or close personal relationship) must exist at policy inception; it is not required to continue until the insured's death.

CLU - Chartered Life Underwriter Practice Test

CLU - Chartered Life Underwriter Practice Test

CLU Individual Life Insurance Planning 4