Chartered Life Underwriter (CLU) Individual Life Insurance Syllabus

What is the 'net amount at risk' in a whole life or universal life policy?

The difference between the policy's death benefit (face amount) and its accumulated cash value (reserve). As the cash value grows, the net amount at risk - the portion the insurer must actually fund from mortality charges - decreases.

Name the standard nonforfeiture options available when a policyowner stops paying premiums on a cash-value policy.

(1) Cash surrender value - take the cash, (2) Reduced paid-up insurance - a smaller fully paid-up policy of the same type, and (3) Extended term insurance - term coverage for the full face amount for as long as the cash value will buy (often the default).

What is the standard policy 'grace period' provision and its effect?

A period (typically 30 or 31 days) after a premium due date during which the policy remains in force; if the insured dies during the grace period, the death benefit is paid less the unpaid premium. If the premium is still unpaid at the end, the policy lapses.

What does the incontestability clause provide?

After the policy has been in force for a stated period (usually 2 years) during the insured's lifetime, the insurer cannot contest or void the policy for material misstatements or concealment in the application (except typically for fraud or nonpayment, per state law).

How does a typical suicide clause in a life insurance policy work?

If the insured dies by suicide within the policy's stated period (usually 2 years from issue), the insurer does not pay the death benefit but refunds the premiums paid. After that period, suicide is covered like any other death.

What is the misstatement of age (or sex) provision?

If the insured's age or sex was misstated on the application, the death benefit is adjusted to the amount the premiums actually paid would have purchased at the correct age/sex - it does not void the policy.

What is the policy reinstatement provision and its typical requirements?

It lets a policyowner restore a lapsed policy (usually within 3-5 years) by providing evidence of insurability, paying all overdue premiums with interest, and repaying or reinstating any outstanding policy loan. The contestable and suicide periods generally restart from reinstatement.

What are the standard dividend options on a participating whole life policy?

(1) Cash, (2) Reduce/pay premiums, (3) Accumulate at interest, (4) Paid-up additions (buy small chunks of additional paid-up insurance), and (5) One-year (additional) term insurance - sometimes the 'fifth dividend option' to buy term equal to the cash value.

Are policy dividends from a participating life policy taxable income?

Generally no - dividends are treated as a return of overpaid premiums and are not taxable until cumulative dividends exceed the total premiums paid (the cost basis). Interest credited on dividends left to accumulate, however, IS taxable.

List the common life insurance settlement (payout) options for death proceeds.

(1) Lump sum (cash), (2) Interest only (insurer holds proceeds, pays interest), (3) Fixed period (proceeds + interest paid over a set time), (4) Fixed amount (set payments until funds exhausted), and (5) Life income options (annuitized for the beneficiary's life, e.g., life only, life with period certain, joint-and-survivor).

How are payments under a life-income settlement option taxed to the beneficiary?

Each payment is part tax-free return of the death benefit principal and part taxable interest. The principal portion of the death benefit is income-tax-free; only the interest earned after the insured's death is taxable income to the beneficiary.

What is the waiver of premium rider?

A rider that waives (the insurer pays) future premiums if the insured becomes totally disabled - typically for a continuous period such as 6 months - keeping the policy fully in force, including continued cash value growth, while the disability lasts.

What does an accidental death benefit (double indemnity) rider provide?

It pays an additional death benefit (often equal to the face amount, hence 'double indemnity') if the insured dies as a direct result of an accident, usually within 90 days of the accident and before a stated age.

What is a guaranteed insurability (option to purchase additional insurance) rider?

It lets the insured buy additional coverage at specified future dates or life events (e.g., marriage, birth) without providing evidence of insurability, locking in future insurability regardless of health changes.

What does an accelerated death benefit (living benefit) rider provide?

It allows the insured to receive a portion of the death benefit while still alive upon a qualifying event such as a terminal, chronic, or critical illness; amounts paid reduce the death benefit ultimately payable to beneficiaries.

Describe the term rider and the family/child rider.

A term rider adds level term coverage on the base insured (or another person) on top of a permanent policy. A child/family rider adds term coverage on the insured's children (and sometimes spouse), often convertible to permanent insurance without evidence of insurability.

What is the purpose of life insurance underwriting?

To assess and classify the mortality risk of an applicant so the policy is priced fairly, prevent adverse selection, and decide whether to accept, rate (charge extra), modify, or decline the application based on factors like age, health, occupation, habits, and finances.

Name common underwriting risk classifications from best to worst.

Preferred plus/preferred (better-than-average risk, lowest rates), Standard (average risk), Substandard/rated (higher-than-average risk, charged extra premium via a table rating or flat extra), and Declined (uninsurable). Some insurers also have a preferred-smoker vs. standard-smoker split.

What information sources do life insurance underwriters commonly use?

The application, medical exam/paramedical and fluid (blood/urine) tests, the Medical Information Bureau (MIB) report, attending physician's statements (APS), prescription (Rx) database checks, motor vehicle records, financial/credit data, and inspection reports.

What is the difference between an APL (automatic premium loan) provision and a regular policy loan?

A regular policy loan is requested by the owner and borrowed against cash value at the policy's loan rate. An automatic premium loan automatically borrows from the cash value to pay an unpaid premium at the end of the grace period, preventing lapse.

How are outstanding policy loans treated at the insured's death?

The death benefit paid to beneficiaries is reduced by the amount of any outstanding loan balance plus accrued loan interest. The loan itself is not taxable while the policy is in force (assuming it is not a MEC and does not lapse).

What are the income-tax rules for cash withdrawals (partial surrenders) from a non-MEC life policy?

Withdrawals are taxed under FIFO (first-in, first-out): amounts up to the policyowner's cost basis (premiums paid) come out income-tax-free first, and only amounts exceeding basis are taxable as ordinary income.

How is the death benefit of a life insurance policy generally taxed for income tax purposes?

Death benefits paid by reason of the insured's death are generally received income-tax-free by the beneficiary under IRC Section 101(a), regardless of whether paid as a lump sum (interest on deferred payouts is taxable).

How is the cash value of a life insurance policy taxed during the insured's lifetime?

Cash value grows tax-deferred (inside buildup is not taxed as it accrues). Tax is triggered on surrender if gain exceeds basis, on withdrawals above basis, or on loans/withdrawals if the contract is a MEC.

How is a gain calculated when a life insurance policy is surrendered for its cash value?

Taxable gain = net cash surrender value received minus the policyowner's cost basis (total premiums paid less any dividends/withdrawals previously received tax-free). The gain is taxed as ordinary income, not capital gain.

Define a Modified Endowment Contract (MEC) and the test that creates one.

A MEC is a life policy that fails the '7-pay test' - it is funded too quickly, with cumulative premiums in the first 7 years exceeding the net level premiums needed to pay the policy up in 7 years. Once a MEC, always a MEC.

How does MEC status change the taxation of distributions (loans/withdrawals)?

Distributions from a MEC are taxed LIFO (last-in, first-out) - gain comes out first and is taxable as ordinary income - and policy loans are also taxable. A 10% penalty applies to taxable amounts taken before age 59 1/2 (with exceptions). The death benefit remains income-tax-free.

State the transfer-for-value rule and its tax consequence.

If a life insurance policy (or interest in it) is transferred for valuable consideration, the death benefit loses its income-tax-free status: only the consideration paid plus subsequent premiums is tax-free, and the remaining death benefit becomes taxable ordinary income to the recipient.

What are the exceptions to the transfer-for-value rule (transfers that preserve tax-free death benefits)?

Transfers to: (1) the insured, (2) a partner of the insured, (3) a partnership in which the insured is a partner, (4) a corporation in which the insured is an officer or shareholder, and (5) a transferee whose basis is determined by reference to the transferor's basis (carryover-basis, e.g., gifts).

What policy replacement considerations and safeguards apply when replacing one life policy with another?

New contestability and suicide periods begin, possible new surrender charges and higher attained-age premiums, evidence of insurability may be required, and the old policy's benefits may be lost. NAIC replacement regulations require disclosure forms and notice to the existing insurer; use a Section 1035 exchange to avoid triggering tax on gains.

What are the main methods used to compare the cost of competing life insurance policies?

The traditional net cost method (often misleading because it ignores the time value of money), the interest-adjusted net surrender cost index, and the interest-adjusted net payment cost index - the latter two discount premiums, dividends, and cash values to reflect the time value of money for fair comparison.

In a life insurance policy illustration, what is the difference between guaranteed and non-guaranteed (current/projected) values?

Guaranteed values use the policy's worst-case contractual assumptions (maximum charges, minimum interest) the insurer must honor. Non-guaranteed values project current dividend/interest scales and current charges, which can change - so illustrations should be evaluated on their guaranteed columns.