Mixed Deck — All CLU Topics Flashcards

Which life insurance concept describes the present value of future premiums expected to be paid, subtracted from the present value of future benefits?

Answer: Policy reserve

The policy reserve (legal reserve) equals the present value of future benefits minus the present value of future net premiums, representing the insurer's liability for each in-force policy.

Under the incontestability clause, after what period can an insurer generally NOT contest a life insurance policy for misrepresentation?

Answer: 2 years

Most states require that life insurance policies become incontestable after 2 years, meaning the insurer cannot void the policy for misrepresentation after that period, except in cases of fraud.

What is the primary advantage of a Roth conversion ladder for early retirement planning?

Answer: Tax-free access to converted principal after 5 years without penalty

Each Roth conversion becomes penalty-free after its own 5-year holding period, allowing early retirees to access funds before age 59½.

A 'transfer for value' rule violation causes which portion of a life insurance death benefit to become taxable?

Answer: Only the amount received in excess of the value paid for the policy plus subsequent premiums paid is taxable

When a policy is transferred for valuable consideration, the death benefit exceeding the buyer's investment (amount paid plus premiums paid after transfer) loses its income-tax exclusion.

Which of the following types of price-setting is the least common?

Answer: Auction

The following nations now conduct auctions: France, Israel, Taiwan, and the United States.

What is the 'sequence of returns risk' and when is it most damaging to a retirement portfolio?

Answer: The risk that poor early returns during distribution phase permanently deplete the portfolio faster

Negative returns early in the distribution phase force selling more shares at depressed prices, permanently reducing the portfolio's ability to recover even if later returns are positive.

Which type of group life insurance provides coverage that remains level throughout the insured's working life and does not increase with salary?

Answer: Flat benefit plan

A flat benefit plan provides the same fixed dollar amount of life insurance to all eligible employees regardless of salary or position.

A client retires with a $1.5 million portfolio and begins withdrawing 4% annually. In the first two years of retirement, the market experiences a severe downturn, causing the portfolio value to drop by 25%. Even if the market fully recovers in subsequent years, the portfolio's longevity is now significantly compromised. This negative outcome is a direct result of which specific investment risk?

Answer: Sequence of returns risk

Sequence of returns risk is the danger that the timing and order of investment returns will negatively impact a portfolio's ability to last, particularly when withdrawals are being made. Poor returns combined with withdrawals in the early years of retirement can deplete a portfolio much faster than if the same poor returns occurred later, because withdrawals during a downturn force the sale of more shares at depressed prices.

A client owns a $500,000 whole life policy with a $75,000 cash value. What is the net amount at risk to the insurer?

Answer: $425,000

The net amount at risk equals the face amount minus the cash value ($500,000 − $75,000 = $425,000), representing the pure insurance element.

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

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

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.

What is the primary purpose of the spendthrift clause in a life insurance policy?

Answer: To prevent beneficiaries from assigning or pledging their interest to creditors

The spendthrift clause protects proceeds held by the insurer under a settlement option from being attached by the beneficiary's creditors or assigned away.

Will someone with an incurable illness not be eligible for work benefits?

Answer: No, ADA prevents exclusion from benefits

The ADA prohibits all forms of discrimination against individuals with disabilities in general.

What would happen to John's beneficiaries if he passes away before paying the last payment to complete the insurance coverage?

Answer: The beneficiaries will not have a claim to the death benefit

The insurance won't cover anything under the contract, even with a minor delay in their payments. Prior to coverage, all contractually mandated payments must be made.

A policyowner names a revocable beneficiary. Which statement correctly describes the policyowner's rights?

Answer: The policyowner can change the beneficiary without the beneficiary's consent

With a revocable beneficiary designation, the policyowner retains full control and may change the beneficiary at any time without obtaining the beneficiary's consent.

Which of the following is completely covered by the insurance provided by the dental plan?

Answer: Diagnostic x-rays

Treatments including aesthetic requirements, tooth replacement, and plaque management are sometimes not reimbursed by insurance or are otherwise excluded.

What is the 'evidence of insurability' requirement most commonly waived in group life insurance during?

Answer: Initial eligibility period when first becoming eligible

Evidence of insurability is most commonly waived during the initial eligibility period — typically the first 30 to 31 days after becoming eligible — encouraging enrollment without medical underwriting.

What is the primary purpose of a Qualified Longevity Annuity Contract (QLAC) in retirement planning?

Answer: To defer income until advanced age (up to 85) and reduce current RMDs

A QLAC is a deferred income annuity purchased inside an IRA that begins payments at a specified future age (up to 85) and reduces the RMD calculation base by the QLAC premium, up to $200,000.

The elimination period in a disability income policy serves a function most similar to which feature found in other insurance lines?

Answer: A deductible

The elimination period is a waiting period the insured must satisfy before benefits begin, functioning like a time-based deductible that reduces premium cost and eliminates short-term claims.

Regarding the tax treatment of a key person life insurance policy owned by and payable to a C-Corporation, which of the following statements is correct?

Answer: The premiums are not deductible, but the death benefit may be subject to the corporate alternative minimum tax (AMT).

Under IRC Section 264, a business cannot deduct the premiums on a life insurance policy where it is the direct or indirect beneficiary. While the death benefit is generally received income tax-free under IRC Section 101(a), for a C-Corporation, the proceeds can increase the corporation's adjusted current earnings (ACE), potentially subjecting the death benefit to the corporate alternative minimum tax (AMT).

A closely held corporation wants to provide liquidity to the estate of its majority shareholder upon her death to cover estate taxes and administrative expenses. Which of the following allows the corporation to redeem a portion of the decedent's stock without the distribution being treated as a dividend?

Answer: A Section 303 Stock Redemption

IRC Section 303 allows a corporation to redeem stock from a deceased shareholder's estate to pay for federal and state death taxes, funeral costs, and administrative expenses, treating the transaction as a sale or exchange (capital gain) rather than a dividend. This is a significant exception to normal redemption rules. To qualify, the value of the stock must exceed 35% of the decedent's adjusted gross estate, among other requirements.