CLU Life Insurance Legal Aspects 2 — Questions and Answers
Question 1: Under the doctrine of reasonable expectations, courts will generally interpret an ambiguous insurance policy in favor of:
- The insurer's underwriting intent
- The insured's reasonable expectations (Correct answer)
- The beneficiary's financial need
- The state insurance department's interpretation
Correct answer: The insured's reasonable expectations
Courts apply the reasonable expectations doctrine to resolve ambiguities in favor of what a reasonable insured would expect the policy to cover.
Question 2: A life insurance policy is classified as a unilateral contract because:
- Only one party may cancel the policy
- Only the insurer makes a legally enforceable promise (Correct answer)
- Only the insured can name a beneficiary
- Only one party pays premiums
Correct answer: Only the insurer makes a legally enforceable promise
A unilateral contract means only one party (the insurer) makes a legally binding promise to perform—the insured is not legally obligated to pay premiums.
Question 3: The incontestability clause in a life insurance policy typically becomes effective after:
- 30 days from policy issue
- 6 months from the first premium payment
- 1 year from policy delivery
- 2 years from the policy issue date (Correct answer)
Correct answer: 2 years from the policy issue date
Most states require the incontestability clause to take effect after two years, after which the insurer cannot void the policy for misrepresentation.
Question 4: Which legal principle prevents an insurer from denying a claim after it has previously accepted premiums with knowledge of a policy violation?
- Subrogation
- Estoppel (Correct answer)
- Indemnity
- Subjectivity
Correct answer: Estoppel
Estoppel prevents an insurer from asserting a defense when its prior conduct (accepting premiums) induced reliance by the insured.
Question 5: When a life insurance applicant misstates their age on the application, the standard policy remedy is to:
- Void the policy entirely
- Adjust the death benefit to what the premium would have purchased at the correct age (Correct answer)
- Pay the full stated death benefit without adjustment
- Refund all premiums with interest
Correct answer: Adjust the death benefit to what the premium would have purchased at the correct age
The misstatement of age provision adjusts the benefit to what the paid premiums would have purchased at the insured's correct age, rather than voiding the policy.
Question 6: Which of the following best describes the legal status of an irrevocable beneficiary designation?
- The policyowner can change it at any time without consent
- The policyowner needs court approval to change it
- The policyowner needs the beneficiary's written consent to change it (Correct answer)
- The designation automatically lapses after 10 years
Correct answer: The policyowner needs the beneficiary's written consent to change it
An irrevocable beneficiary has a vested interest in the policy, so the policyowner cannot change the designation or assign the policy without that beneficiary's written consent.
Question 7: The legal concept of 'adhesion' in insurance contracts means that:
- Both parties drafted the contract together
- The insured must adhere to all policy conditions or lose coverage
- The contract was drafted by one party and offered on a take-it-or-leave-it basis (Correct answer)
- The policy terms adhere to state statutory minimums
Correct answer: The contract was drafted by one party and offered on a take-it-or-leave-it basis
A contract of adhesion is drafted exclusively by the insurer; the applicant can only accept or reject it, which justifies courts construing ambiguities against the drafter.
CLU Life Insurance Legal Aspects 2
Under the doctrine of reasonable expectations, courts will generally interpret an ambiguous insurance policy in favor of: