FREE Chartered Life Underwriter (CLU) Insurance and Risk Management Questions and Answers

Question 1

A pharmaceutical company conducts research and discovers that a profitable medication has a rare but severe side effect.
To eliminate any future liability and potential harm, the company decides to completely halt production and recall the product from the market.
Which risk management technique does this action represent?

Accepted Answer

Risk Avoidance

Answer

Risk Retention

Answer

Risk Transfer

Answer

Risk Reduction

Question 2

An applicant for a life insurance policy intentionally fails to disclose a history of heart disease, a fact that would have caused the insurer to decline the application or charge a much higher premium. This concealment is a direct violation of which fundamental legal principle of insurance contracts?

Accepted Answer

The Principle of Utmost Good Faith

Answer

The Principle of Indemnity

Answer

The Doctrine of Adhesion

Answer

The Aleatory Contract Principle

Question 3

A highly skilled surgeon sustains an injury that prevents her from performing surgery, but she is still able to work as a university lecturer and medical consultant. Her disability income policy begins to pay her full benefits. Which definition of total disability is MOST likely included in her policy?

Accepted Answer

Own-occupation

Answer

Any-occupation

Answer

Residual disability

Answer

Social Security disability

Question 4

Regarding the federal income tax implications of a non-discriminatory group term life insurance plan, which of the following statements is correct?

Accepted Answer

The cost of coverage in excess of $50,000, determined by an IRS table, must be included in the employee's gross income.

Answer

The employer cannot deduct the premiums paid for the plan as a business expense.

Answer

The employee must include the economic benefit of the first $50,000 of coverage as taxable income.

Answer

The entire death benefit paid to a beneficiary is subject to federal income tax.

Question 5

A life insurance policy provision states that after the policy has been in force for a certain period (typically two years) during the insured's lifetime, the insurer cannot void the policy or deny a claim based on a material misrepresentation made by the insured in the application. What is this provision called?

Accepted Answer

Incontestability Clause

Answer

Suicide Clause

Answer

Grace Period Provision

Answer

Reinstatement Clause

Question 6

A client purchased a non-qualified deferred annuity with an after-tax premium of $120,000. Years later, the annuity's value has grown to $200,000, and the client decides to annuitize the contract to receive lifetime income payments. How is the income from these payments taxed?

Accepted Answer

Each payment consists of a tax-free return of principal and a taxable portion of the gain, determined by an exclusion ratio.

Answer

All payments are received tax-free until the $120,000 basis is recovered, after which payments are fully taxable.

Answer

The $80,000 gain is taxed immediately upon annuitization, and all subsequent payments are tax-free.

Answer

The entirety of each payment is taxed as ordinary income from the very first payment.