CLU Life Insurance Legal Aspects 3 — Questions and Answers
Question 1: Under the spendthrift clause in a life insurance settlement option, the beneficiary's interest is protected from:
- Federal income tax on proceeds
- Claims of the beneficiary's creditors (Correct answer)
- State premium taxes
- The insurer's insolvency
Correct answer: Claims of the beneficiary's creditors
A spendthrift clause prevents the beneficiary's creditors from attaching proceeds held by the insurer under a settlement option before they are paid out.
Question 2: The 'facility of payment' clause in group life insurance allows the insurer to:
- Pay the death benefit in installments rather than a lump sum
- Pay proceeds to a relative or dependant if no beneficiary has been named (Correct answer)
- Waive the death certificate requirement for small claims
- Convert the policy to individual coverage without evidence of insurability
Correct answer: Pay proceeds to a relative or dependant if no beneficiary has been named
The facility of payment clause permits the insurer to pay up to a specified small amount to a relative or person who paid funeral expenses when no valid beneficiary designation exists.
Question 3: Which of the following transfers of a life insurance policy requires the insurer's written consent to be valid?
- Absolute assignment
- Collateral assignment (Correct answer)
- Change of beneficiary to a minor
- Change from revocable to irrevocable beneficiary
Correct answer: Collateral assignment
A collateral assignment, used to secure a loan, typically requires the insurer's acknowledgment to be valid and to establish priority of the lender's interest.
Question 4: The 'entire contract' clause in a life insurance policy legally means that:
- The policy cannot be modified after delivery
- The policy and attached application constitute the complete agreement between the parties (Correct answer)
- Only the insurer can interpret the policy terms
- The agent's oral representations are part of the contract
Correct answer: The policy and attached application constitute the complete agreement between the parties
The entire contract clause specifies that the policy and the attached application form the complete, binding contract, excluding any outside representations or documents.
Question 5: Under the free-look provision mandated in most states, the policyowner has the right to return a newly issued life policy and receive a full premium refund within:
- 5 business days of delivery
- 10 to 30 days of delivery (Correct answer)
- 60 days of delivery
- 6 months of delivery
Correct answer: 10 to 30 days of delivery
Most states require a 10- to 30-day free-look period during which the new policyowner may return the policy for a full refund of premiums paid.
Question 6: A life insurance policy settlement option under which the insurer pays interest only, with principal payable on demand or at the beneficiary's death, is called the:
- Fixed period option
- Life income option
- Interest option (Correct answer)
- Fixed amount option
Correct answer: Interest option
Under the interest option, the insurer retains the principal and pays periodic interest, giving the beneficiary flexibility to withdraw principal later.
Question 7: Which legal doctrine holds that an insurance agent's knowledge of a material fact, obtained while acting within the scope of authority, is imputed to the insurer?
- Respondeat superior
- The parol evidence rule
- The rule of imputed knowledge (agency) (Correct answer)
- The doctrine of reasonable expectations
Correct answer: The rule of imputed knowledge (agency)
Under agency law, knowledge acquired by an agent within the scope of their authority is legally attributed to the principal (the insurer), which can prevent the insurer from later claiming ignorance.
CLU Life Insurance Legal Aspects 3
Under the spendthrift clause in a life insurance settlement option, the beneficiary's interest is protected from: