An insured stated her age as 45 on her application and paid the corresponding rate of $8.00 per $1,000 of face amount on a $250,000 policy. After her death, the insurer discovers her correct age at issue was 48, which carries a rate of $10.00 per $1,000. Under the misstatement of age provision, what death benefit will the beneficiary receive?

$200,000, the face amount the premium actually paid would have purchased at the correct age

A small business owner collaterally assigns his $400,000 key person life insurance policy to a bank as security for a $150,000 loan. He later dies while the outstanding loan balance stands at $90,000. How are the death proceeds distributed?

The bank receives $90,000, the current outstanding debt, and the remaining $310,000 goes to the named beneficiary

An agent is soliciting a new permanent policy that will replace an existing policy issued by a different insurer. Under the NAIC-style replacement regulation adopted in most states, which step is generally required?

The applicant receives a notice regarding replacement, and the replacing insurer notifies the existing insurer of the proposed replacement

In insurance law, a key distinction between a warranty and a representation on an insurance application is that a warranty:

Must be literally and exactly true, and its breach can void the contract regardless of the misstatement's materiality, whereas a representation need only be substantially true

A policy has a 31-day grace period. For four years the insurer accepted premiums about 40 days after the due date without objection. When a later premium arrived 40 days late, it declared the policy lapsed. The insured has since died. Which doctrine most strongly supports the beneficiary's claim that the policy remained in force?

Waiver or estoppel, because the insurer's repeated acceptance of late premiums created a reasonable expectation that the timing rule would not be enforced

Because the insurer drafts every term of a life insurance policy and the applicant may only accept or reject it as written, courts generally resolve genuine ambiguities in the policy language in favor of which party?

The insured or beneficiary, since the insurer drafted the contract of adhesion

In a community property state, one spouse purchases a life insurance policy on their own life using community funds and names a friend (not the other spouse) as sole primary beneficiary without the other spouse's consent. Under general community property principles, which statement is most accurate?

The non-consenting spouse may generally have a claim to a community property interest in the policy's value or proceeds, even though the beneficiary designation itself may otherwise stand

CLU Life Insurance Law Practice Questions

Official outline: The American College CLU designation (courses)
Questions on this page: 7
Updated: Nov 3, 2026

Question 1, medium
An insured stated her age as 45 on her application and paid the corresponding rate of $8.00 per $1,000 of face amount on a $250,000 policy. After her death, the insurer discovers her correct age at issue was 48, which carries a rate of $10.00 per $1,000. Under the misstatement of age provision, what death benefit will the beneficiary receive?
- A.$250,000, unaffected since the misstatement wasn't fraudulent
- B.$312,500, grossed up to reflect the age difference
- C.$200,000, the face amount the premium actually paid would have purchased at the correct age
- D.$0, because the policy is void for material misrepresentation
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Correct answer: C. $200,000, the face amount the premium actually paid would have purchased at the correct age
The misstatement of age (and/or sex) provision doesn't void the policy or ignore the error. It adjusts the death benefit to the amount the premiums actually paid would have purchased at the insured's correct age and rate: $250,000 x ($8.00 / $10.00) = $200,000. This provision exists specifically so that an honest clerical or unintentional age error results in a fair benefit adjustment rather than a denied claim.
- A. Incorrect. Misstatement of age (even if unintentional) does adjust the benefit; the policy isn't left unaffected.
- B. Incorrect. This grosses the benefit up in the wrong direction; a misstated (understated) age that resulted in underpayment of premium reduces the benefit, it doesn't increase it.
- C. Correct. The death benefit is adjusted to what the premium actually paid ($8/$1,000) would have purchased at the correct age's rate ($10/$1,000): $250,000 × (8/10) = $200,000.
- D. Incorrect. Misstatement of age is not treated as fraud or grounds to void the policy; it's addressed by adjusting the death benefit proportionally.
- Source: Exam outline: The American College CLU designation (courses), accessed October 2026
Question 2, hard
A small business owner collaterally assigns his $400,000 key person life insurance policy to a bank as security for a $150,000 loan. He later dies while the outstanding loan balance stands at $90,000. How are the death proceeds distributed?
- A.The bank receives the full $400,000 because it holds the collateral assignment
- B.All proceeds are frozen until the business's estate is fully settled
- C.The bank receives $150,000, the original loan amount, regardless of how much has been repaid
- D.The bank receives $90,000, the current outstanding debt, and the remaining $310,000 goes to the named beneficiary
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Correct answer: D. The bank receives $90,000, the current outstanding debt, and the remaining $310,000 goes to the named beneficiary
A collateral assignment gives the assignee (the bank) rights limited strictly to its current interest. The outstanding loan balance at the time of the claim, here $90,000. With any remainder of the death benefit paid to the named beneficiary. This differs from an absolute assignment, which would transfer full ownership and all rights to the assignee.
- A. The bank's collateral interest is limited to satisfying the outstanding debt, not the full face amount of the policy.
- B. A collateral assignment doesn't freeze proceeds pending estate settlement; it simply directs the bank's specified share to the lender with the rest paid out per the beneficiary designation.
- C. The bank's claim tracks the current outstanding balance, not the original loan amount, since $60,000 has already been repaid.
- D. Correct. Under a collateral assignment, the bank receives only enough to cover the current outstanding balance ($90,000), and the remainder ($310,000) goes to the named beneficiary.
- Source: Exam outline: The American College CLU designation (courses), accessed October 2026
Question 3, medium
An agent is soliciting a new permanent policy that will replace an existing policy issued by a different insurer. Under the NAIC-style replacement regulation adopted in most states, which step is generally required?
- A.The existing insurer gives written approval before the new application may be submitted
- B.The applicant receives a notice regarding replacement, and the replacing insurer notifies the existing insurer of the proposed replacement
- C.The new policy's effective date is delayed until a mandatory 60-day waiting period has passed
- D.The proposed replacement is filed with the state insurance department for advance approval, and the policy may not be issued until the department signs off on it
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Correct answer: B. The applicant receives a notice regarding replacement, and the replacing insurer notifies the existing insurer of the proposed replacement
Replacement regulations require disclosure so the applicant can compare policies. The agent must provide a notice regarding replacement, and the replacing insurer must notify the existing insurer so it can respond or conserve the business.
- A. The existing insurer receives notice but has no power to approve or block the replacement.
- B. Correct. Notice to the applicant and notice to the existing insurer are the core replacement requirements.
- C. There is no mandatory waiting period before a replacement policy takes effect; the free-look period protects the owner afterward.
- D. Individual replacements are not submitted to the state department for pre-approval; the regulation relies on notices and disclosures to the applicant and the existing insurer.
- Source: Exam outline: The American College CLU designation (courses), accessed October 2026
Question 4, hard
In insurance law, a key distinction between a warranty and a representation on an insurance application is that a warranty:
- A.Must be literally and exactly true, and its breach can void the contract regardless of the misstatement's materiality, whereas a representation need only be substantially true
- B.Is a less binding statement than a representation, and a breach generally affects the contract only if the insurer proves it was both material and intentional
- C.Applies mainly to property and casualty insurance contracts, because warranties are a feature of marine and property coverage and are not recognized in life insurance under any state's insurance code
- D.Is a promise made by the insurer about the policy's terms, whereas a representation is a statement made by the applicant about the risk
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Correct answer: A. Must be literally and exactly true, and its breach can void the contract regardless of the misstatement's materiality, whereas a representation need only be substantially true
Historically, a warranty is a statement that becomes part of the contract and must be exactly true; any breach, even an immaterial one, could void the policy. A representation, by contrast, need only be substantially true, and materiality of any misstatement matters for it to affect the contract. Most modern statutes have converted application statements into representations to protect policyholders, but the conceptual distinction remains tested material.
- A. Correct. This fully and correctly states the classic warranty/representation distinction.
- B. Incorrect. Reverses the relative strictness; a warranty is more binding than a representation, since its exact truth is required whether or not the misstatement was material.
- C. Incorrect. The warranty/representation distinction is general contract law applicable across insurance lines, including life insurance, and is not limited to P&C or absent from state insurance codes.
- D. Incorrect. A warranty is a statement by the applicant that is made part of the contract and must be exactly true; it is not a promise by the insurer.
- Source: Exam outline: The American College CLU designation (courses), accessed October 2026
Question 5, medium
A policy has a 31-day grace period. For four years the insurer accepted premiums about 40 days after the due date without objection. When a later premium arrived 40 days late, it declared the policy lapsed. The insured has since died. Which doctrine most strongly supports the beneficiary's claim that the policy remained in force?
- A.The parol evidence rule, because the earlier payments changed the written terms
- B.Subrogation, because the insurer stepped into the owner's rights against a third party who caused the loss and may therefore recover from that party what it paid out under the policy
- C.Reformation, because a mutual mistake requires the contract to be rewritten
- D.Waiver or estoppel, because the insurer's repeated acceptance of late premiums created a reasonable expectation that the timing rule would not be enforced
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Correct answer: D. Waiver or estoppel, because the insurer's repeated acceptance of late premiums created a reasonable expectation that the timing rule would not be enforced
Waiver is the intentional relinquishment of a known right, and estoppel bars a party from asserting a right after its conduct led another to rely on a contrary position. An insurer that routinely accepted late premiums may be prevented from enforcing the lapse provision without notice.
- A. The parol evidence rule limits prior or contemporaneous oral terms and does not turn a course of dealing into a contract amendment.
- B. Subrogation lets an insurer recover from a third party after paying a loss; it says nothing about whether late premium acceptance kept the policy in force.
- C. Reformation corrects a written contract for mutual mistake or fraud; no mistake about its terms is alleged.
- D. Correct. A consistent course of conduct accepting late payments supports waiver or estoppel against strict enforcement.
- Source: Exam outline: The American College CLU designation (courses), accessed October 2026
Question 6, easy
Because the insurer drafts every term of a life insurance policy and the applicant may only accept or reject it as written, courts generally resolve genuine ambiguities in the policy language in favor of which party?
- A.The party with the larger financial stake, since the policy's face amount measures the harm
- B.The insurer, since it knows the underwriting intent behind each term it wrote into the policy
- C.The insured or beneficiary, since the insurer drafted the contract of adhesion
- D.Neither party; the court must apply the literal wording strictly, whoever drafted the contract
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Correct answer: C. The insured or beneficiary, since the insurer drafted the contract of adhesion
Because a life insurance policy is a contract of adhesion. Drafted entirely by the insurer with no negotiation by the applicant. Courts apply the doctrine of contra proferentem, construing genuine ambiguities against the drafter (the insurer) and in favor of the insured/beneficiary.
- A. Incorrect. Courts do not resolve ambiguity by comparing the parties' financial stakes. The rule for construing ambiguous terms turns on who drafted the language, not on the size of the claim or the amount at risk.
- B. Incorrect. The insurer's underwriting intent does not control an ambiguous term. Because the insurer chose the wording and could have drafted it more clearly, courts generally construe genuine ambiguity against the insurer, not for it.
- C. Correct. Because the insurer drafts the contract of adhesion and the applicant has no power to negotiate terms, courts construe genuine ambiguities against the drafter and in favor of the insured or beneficiary.
- D. Incorrect. Strict literal reading applies when the language is clear. Where a term is genuinely ambiguous, courts generally construe it against the drafter (contra proferentem), so the dispute is not decided by literalism or by voiding the contract.
- Source: Exam outline: The American College CLU designation (courses), accessed October 2026
Question 7, hard
In a community property state, one spouse purchases a life insurance policy on their own life using community funds and names a friend (not the other spouse) as sole primary beneficiary without the other spouse's consent. Under general community property principles, which statement is most accurate?
- A.The designation is void in its entirety unless the other spouse signs a written consent, because community property law requires a spouse to be named as beneficiary of any policy bought with community funds
- B.Naming the friend as beneficiary converts the policy and its proceeds to the friend's separate property, which cuts off any claim by the other spouse over the funds used to pay premiums
- C.Community property law reaches real estate and bank accounts but not life insurance policies, so the other spouse has no claim to the policy's value or proceeds even if community funds paid the premiums
- D.The non-consenting spouse may generally have a claim to a community property interest in the policy's value or proceeds, even though the beneficiary designation itself may otherwise stand
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Correct answer: D. The non-consenting spouse may generally have a claim to a community property interest in the policy's value or proceeds, even though the beneficiary designation itself may otherwise stand
In community property states, income earned and property acquired during marriage (including funds used to purchase a life insurance policy) is generally treated as community property, giving both spouses an interest even if the policy is nominally owned by one spouse and names a third party as beneficiary. Courts in many community property states have held that a non-owner spouse retains a community property interest despite a valid beneficiary designation to someone else, though the specific remedy and outcome vary by state.
- A. Overstated. Community property law doesn't require the other spouse's consent or bar naming a non-spouse beneficiary; the issue is the non-owning spouse's economic interest in community funds used to pay premiums, not the validity of the designation itself.
- B. Fabricated. Naming a third party as beneficiary doesn't change the character of the funds used to pay premiums from community to separate property, and it doesn't cut off the other spouse's interest.
- C. Incorrect. Community property principles very much apply to life insurance purchased with community funds, affecting ownership and proceeds even when a policy is titled in one spouse's name.
- D. Correct. Because the premiums were paid with community funds, the non-consenting spouse typically retains a community property claim to a share of the policy's value or proceeds, even if the beneficiary designation is otherwise honored.
- Source: Exam outline: The American College CLU designation (courses), accessed October 2026

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