Practice Free Life-Producer Maryland Life Producer Exam (Series 20-27) Exam Questions Answers With Explanation

Purpose of mortgage protection insurance.

Mortgage protection life insurance is designed to:

Pay off or reduce the mortgage balance if the insured dies.

Structure of most mortgage protection policies.

The death benefit typically decreases over time as the mortgage balance declines.

However, the premium usually remains level throughout the policy term.

Why level premiums are used.

Level premiums make budgeting easier for homeowners.

The insurer prices the policy based on average risk over the term.

Evaluate each option.

A. Remains level

Correct.

B. Increases every five years

Describes step-rate term insurance, not typical mortgage protection.

C. Increases every ten years

Not standard for mortgage protection.

D. Fluctuates with interest rate

Incorrect. Insurance premiums are not tied to mortgage interest rates.

Maryland consumer disclosure relevance.

Maryland requires producers to explain decreasing benefits and level premiums to avoid consumer confusion.

Conclusion.

Mortgage protection premiums typically remain level.

Purpose of a conditional receipt.

A conditional receipt provides temporary coverage when the initial premium is paid with the application.

Coverage is conditional upon the applicant being insurable as applied for.

When it must be issued.

When the applicant submits:

A completed application, and

The initial premium

The producer must provide a conditional receipt.

Connection to the application form.

The conditional receipt is issued at the same time as the application, acknowledging receipt of the premium.

It is not tied to policy delivery or underwriting completion.

Why the other options are incorrect.

Statement of good health: Used when premium was not paid initially.

Policy delivery receipt: Used only after underwriting approval.

Bank draft authorization: Merely authorizes payment, not coverage.

Maryland consumer protection importance.

Maryland law emphasizes clear disclosure of when coverage begins, preventing unfair claim denials.

Conclusion.

A conditional receipt is issued with the policy application when the initial premium is paid.

Understanding surrender and loan features.

Surrender values and policy loans are features tied to cash value life insurance.

These features are required by nonforfeiture laws, which protect policyowners from losing all value if a policy is discontinued.

Which policies build cash value?

Universal life: Builds cash value ? surrender and loan features required.

Twenty payment life: A form of whole life ? cash value present.

Endowment insurance: Accumulates cash value and matures at a set age.

Why term life is different.

Five-year term life provides pure death protection only.

No cash value accumulates.

Therefore, no surrender value and no loan provision are required or available.

Maryland nonforfeiture relevance.

Maryland requires nonforfeiture protections only for policies with cash value.

Term insurance is excluded from these requirements.

Conclusion.

Because it has no cash value, five-year term life does not require surrender or loan features.

Role of federal securities regulation.

Securities laws regulate investments such as:

Stocks

Bonds

Variable life insurance

Variable annuities

Authority of the SEC.

The Securities and Exchange Commission (SEC) is the federal agency created by Congress to:

Enforce federal securities laws

Regulate securities markets

Protect investors

Relevance to insurance producers.

Maryland producers selling variable products must:

Hold an insurance license, and

Be registered with FINRA and regulated by the SEC.

Why the other options are incorrect.

The other agencies listed do not exist under federal law.

Conclusion.

The SEC enforces securities laws enacted by Congress.

Authority of the Maryland Insurance Administration (MIA).

The MIA has the authority to investigate complaints, conduct hearings, and impose disciplinary actions against licensed producers.

Evaluate each option.

A. Investigation and hearing

Correct. The MIA investigates alleged violations and may hold administrative hearings.

B. Decision is final

Incorrect. MIA decisions are subject to judicial review and appeal under Maryland administrative law.

C. License suspension

Correct. The MIA may suspend, revoke, or refuse to renew a producer’s license.

Good-faith enforcement relevance.

Maryland’s system ensures fairness by allowing producers due process and appeal rights.

Conclusion.

Because MIA decisions are not automatically final, option B is the correct answer.

The incontestability clause prevents insurers from voiding a policy after a specified period, except in cases of fraud or non-payment of premiums:

2 years (C): Maryland law mandates a maximum incontestability period of two years. After this period, the insurer cannot deny claims due to misstatements on the application.

30 days (A) and 6 months (B): Too short for standard incontestability clauses.

3 years (D): Exceeds the Maryland limit.

General tax rule for life insurance death benefits.

Under federal tax law, life insurance death proceeds paid to a beneficiary are generally income-tax free.

Why this rule exists.

Life insurance is intended to provide financial protection, not taxable income replacement.

Evaluate each option carefully.

A. Exempt from federal income tax

Correct. This is the general rule.

B. Transfer for value

Only applies in limited circumstances when a policy is sold or transferred.

C. Cost recovery rule

Applies to annuities, not death benefits.

D. Interest-first rule

Also applies to annuity distributions, not life insurance death proceeds.

Maryland tax treatment.

Maryland follows the federal rule and does not impose state income tax on life insurance death benefits.

Conclusion.

Life insurance death proceeds are generally income-tax free.

Definition of coercion.

Coercion involves using threats, intimidation, or pressure to force a purchase.

Apply the facts.

The producer attempts to intimidate the prospective insured.

This directly meets the definition of coercion.

Why other options are incorrect.

Defamation: False statements harming reputation.

Twisting: Misrepresentation to replace a policy.

Discrimination: Unequal treatment of insureds.

Maryland enforcement relevance.

Coercion is prohibited as an unfair trade practice and may result in license discipline.

Conclusion.

Intimidation constitutes coercion.

Cash values in whole life insurance are a key feature, and they:

Accumulate as a result of the level premium concept (A), where excess premiums in the early years of the policy build the cash value.

Are guaranteed in whole life policies, contrary to option B.

Do not equal the face value at age 65 (C) unless specifically structured for that purpose.

Continue to grow beyond age 65 as long as the policy remains active, invalidating option D.

Group life insurance policies in Maryland typically include a conversion privilege allowing former employees to convert group coverage to an individual policy within a 31-day period after termination, regardless of premium payment status.

$50,000 under the group plan (A): Correct. During the 31-day conversion period, the original group coverage remains in effect. If the insured dies during this time, the death benefit is paid under the group plan.

$50,000 under the new policy (B and C): Incorrect, as the conversion policy does not become effective until the first premium is paid.

Nothing at all (D): Incorrect, as coverage is still active during the conversion period.

Purpose of key person life insurance.

Key person insurance protects a business against financial loss caused by the premature death of a critical employee.

Types of losses covered indirectly.

Loss of revenue

Loss of expertise or leadership

Costs associated with:

Recruiting a replacement

Training a replacement

Loss of business continuity

Evaluate each option carefully.

A. Tax deduction

Incorrect. Premiums for key person insurance are generally not tax-deductible.

B. Pay estate taxes for the employee

Incorrect. Estate taxes are a personal matter, not a business obligation.

C. Pay the employee’s mortgage

Incorrect. This is unrelated to the business’s financial exposure.

D. Pay for replacement costs

Correct. This is a classic and legitimate use of key person insurance.

Maryland insurable interest relevance.

Maryland law recognizes that businesses have an insurable interest in key employees whose death would cause economic harm.

Conclusion.

Businesses buy key person life insurance to cover financial losses and replacement costs.

Underwriting involves evaluating risk factors that could influence the likelihood of claims and ensuring compliance with anti-discrimination laws.

Ethnic heritage (A): Incorrect. Using ethnic heritage as an underwriting factor violates anti-discrimination laws, including Maryland Insurance Article §27-501.

Amount of insurance applied for (B): Correct. Insurers consider coverage amounts to assess risk and pricing.

Driving record (C): Correct. Poor driving history, particularly DUI incidents, increases risk.

Family health history (D): Correct. Inherited conditions and family medical history help predict potential health risks.

In Maryland, the replacement of life insurance policies requires safeguards to protect policyholders.

The Important Notice Replacement of Life Insurance or Annuities form must be signed by both the applicant and the insurance producer (B) to ensure informed consent and regulatory compliance.

The applicant only (A) does not suffice, as producer acknowledgment is essential.

The producer only (C) lacks the policyholder’s agreement.

An officer of the insurer (D) does not participate in this process.

The buyer’s guide helps policyholders understand life insurance by offering:

Advice on deciding coverage needs (B) to ensure adequate protection.

Rate comparison tools (C) to evaluate costs effectively.

Guidance on policy requirements (D) to make informed choices.

The guide does not address legal actions such as taking civil action against an insurer (A), as such matters require legal consultation or regulatory support.

Qualified retirement plans, such as 401(k) and pension plans, offer significant tax advantages for employers:

Tax-deductible contributions (B): Employer contributions to qualified plans are deductible as business expenses, reducing taxable income.

Exclusive benefit for key employees (A): Not allowed under IRS rules, as qualified plans must follow non-discrimination requirements.

Funds available for business needs (C): Incorrect, as plan funds are held in trust and cannot be used for business operations.

Rewarding selected employees (D): Qualified plans must comply with anti-discrimination rules, so rewards must benefit all eligible employees.

Accidental death riders provide additional benefits if the insured dies due to an unforeseen accident.

Automobile accidents resulting from the insured’s negligence (D): Covered because negligence in driving does not disqualify the event from being an accident. The death must be directly and solely caused by the accident.

Intentionally self-inflicted injuries (A): Excluded as they are not accidental but intentional.

Illness or disease (B): Excluded as accidental death benefits do not apply to natural causes.

War or acts of war (C): Generally excluded under most policies as a specific clause addresses wartime risks.

Nature of group life insurance.

Group life insurance is typically tied to employment and ends when employment terminates.

Purpose of the conversion provision.

The conversion provision protects employees by allowing them to:

Convert group coverage to an individual policy

Do so without evidence of insurability

Apply within a specified time period after termination

Why conversion is critical.

Prevents loss of coverage due to job loss or retirement.

Especially important if the employee’s health has declined.

Evaluate each option.

A. Nonforfeiture

Applies to cash value policies, not group life.

B. Conversion

Correct. This provision grants the conversion right.

C. Assignment

Transfers ownership, not coverage type.

D. Incontestability

Limits defenses after a period of time.

Maryland consumer protection relevance.

Maryland requires clear disclosure of conversion rights to prevent gaps in life insurance protection.

Conclusion.

The conversion provision allows group coverage to become individual coverage.

Qualified retirement plans are regulated by IRS rules:

Contributions cannot exceed IRS limits (C), which are updated annually.

Contributions are not arbitrarily determined by employers (A) or based on employee performance (D).

Employers may make varying contributions, invalidating (B).

Participating life insurance policies are typically issued by mutual insurers and allow policyholders to:

Receive dividends (A), which are excess profits returned to policyholders.

Policyholders are not assessed for losses (B); insurers absorb losses.

The insured and policyowner can be separate entities, invalidating (C).

Mutual insurers, not stock companies, issue most participating policies, making (D) incorrect.

Tax treatment of deferred annuities.

A deferred annuity accumulates interest on a tax-deferred basis.

Interest earnings are not reported annually while they remain in the contract.

Trigger for taxation.

Federal tax law, followed by Maryland for income reporting, requires taxation only when distributions are received.

Interest is taxed as ordinary income, not capital gains.

Evaluate each option.

A. Annually

Incorrect. This would describe taxable interest accounts, not annuities.

B. After recovering principal

Incorrect. Under the LIFO rules for annuities, interest is taxed first.

C. Upon receiving distributions or income benefits

Correct. This is when taxation occurs.

D. Tax-exempt

Incorrect. Annuities are tax-deferred, not tax-exempt.

Conclusion.

Interest income is reported when distributions are received.

Understanding annuity phases.

An annuity has two primary phases:

Accumulation period: when premiums are paid and values grow.

Annuity (liquidation) period: when income payments are received.

Apply the facts.

The question describes premium payments being made over time.

No income distributions are occurring yet.

Why the other options are incorrect.

Liquidation / annuity period involves payouts, not payments.

Period certain describes a payout guarantee, not a payment phase.

Conclusion.

Premium payments are made during the accumulation period.

Purpose of the minimum distribution rule.

The Required Minimum Distribution (RMD) rule ensures that retirement funds, which received tax deferral, are eventually taxed rather than deferred indefinitely.

Federal law threshold age.

Traditionally, federal law required RMDs to begin at age 70½.

(Note: While federal law has since changed the RMD age, licensing exams and many state outlines—including Maryland exam materials—still test 70½ as the correct answer.)

Why earlier ages are incorrect.

59½: Relevant for early withdrawal penalties, not RMDs.

62: Common Social Security age, not an RMD trigger.

65: Medicare eligibility age, not related to RMDs.

Maryland tax conformity.

Maryland generally follows federal retirement distribution rules for income taxation.

Conclusion.

For exam and regulatory purposes, minimum distributions begin at age 70½.

Insurance producers using an assumed or fictitious name for their business must file the name with the Maryland Insurance Administration (MIA).

File the name with the Insurance Administration (A): This ensures transparency and compliance with regulatory standards.

Apply for an additional license (B): Not required; the existing license covers the producer.

Apply for an additional appointment (C): Applies when a producer represents multiple insurers, not for fictitious names.

Post a $10,000 bond (D): Irrelevant to this context.

Ethical responsibilities and state laws mandate that insurance producers act in good faith when handling applications.

Reporting material facts to the insurer (D): Producers must disclose any information that could impact underwriting decisions. Transparency ensures that policies are accurately priced and legally enforceable.

Denying knowledge (A): Violates ethical and legal obligations.

Acknowledging facts only if asked (B): Demonstrates bad faith and can lead to legal penalties.

Advising applicants to amend (C): While this helps, it does not fulfill the producer’s duty to inform the insurer.

Purpose of insurance advertising regulation in Maryland.

Maryland regulates insurance advertising to protect consumers from misrepresentation, deception, and unfair trade practices.

Advertising rules are designed to ensure honesty, accuracy, and fair competition.

Evaluate each option.

A. Establish minimum standards of conduct

Correct. Maryland sets minimum advertising standards to ensure ethical practices.

B. Prevent unfair competition among insurers

Correct. Advertising rules prevent insurers from gaining an unfair advantage through misleading claims.

C. Maintain a low profile for insurance products

Incorrect. Regulators do not restrict visibility or promotion of insurance products; they regulate how products are advertised, not whether they are promoted.

D. Present an accurate description of insurance to the public

Correct. Accuracy and clarity are primary goals of Maryland insurance advertising regulation.

Conclusion.

Maintaining a low profile is not a regulatory goal, making option C the correct answer.

The insurer’s expenses are a critical factor in premium calculations. Insurers must cover operational costs, claims payouts, reserves, and regulatory compliance while ensuring profitability.

Insurer (B): Correct. Expenses such as underwriting, administrative costs, and agent commissions are incorporated into the premium.

Producer (A): Costs are included indirectly through commissions but are not a direct factor.

Policy beneficiary (C): Plays no role in premium determination.

Policy owner (D): Pays the premium but does not influence expense considerations.

Understanding structured payments.

Large settlements and awards are often paid over time to provide steady income, improve financial security, and reduce the risk of rapid depletion.

Evaluate each option.

A. Modified endowment contract (MEC)

Used for life insurance tax classification, not settlement structuring.

B. Individual retirement account (IRA)

Designed for retirement savings, not settlement payouts.

C. 403(b) tax-sheltered annuity

Employer-sponsored retirement plan for certain employees.

D. Immediate annuity

Correct. Immediate annuities are commonly used to provide guaranteed periodic payments from a lump sum.

Maryland claims and settlement context.

Structured settlements using immediate annuities are widely accepted in Maryland liability claims as they promote long-term financial stability, aligning with good-faith settlement practices.

Conclusion.

An immediate annuity is the standard tool used to structure large settlement payments.

The doctrine of reasonable expectations ensures that ambiguities in insurance policies are resolved in favor of the policyholder:

Reasonable expectations (B): Protects policyholders by ensuring contracts are interpreted based on how an average person would understand them, especially when ambiguities exist.

Representation (A): Refers to the accuracy of statements made during application, unrelated to contract interpretation.

Retention (C): Concerns risk management, not contract ambiguities.

Retrocession (D): Deals with reinsurance, not policyholder rights.

Individual life insurance policies often allow riders or supplementary coverage options, but they do not cover workers' compensation, which is a separate insurance category.

Disability (A): Can be included as a rider, such as a waiver of premium or disability income benefit.

Long-term care (B): Often available as an optional rider to address extended medical care expenses.

Burial (D): Final expense policies or riders can be added to cover funeral and burial costs.

Workers’ compensation (C): Not covered under life insurance policies; this is a specific insurance product regulated differently.

Boycott refers to the refusal to engage in business dealings with a particular party as part of an unfair trade practice, often used to coerce or punish. It is prohibited under Maryland’s Unfair Trade Practices Act.

Boycott (C): Defined as an unfair method of competition when used in the insurance context.

Estoppel (A): A legal doctrine preventing someone from asserting a claim inconsistent with previous actions, unrelated to business refusal.

Injunction (B): A court order stopping specific actions, not related to refusal to do business.

Binder (D): Temporary insurance coverage, unrelated to trade practices.

Key facts from the question.

One lump-sum payment

No additional premiums allowed

Payments begin in the future (17 years later)

Define single premium deferred annuity (SPDA).

Funded with one premium payment

Includes an accumulation period

Income begins at a future date

Why this is not another type of annuity.

Individual life annuity: Describes payout form, not funding method.

IRA annuity: Must be held within an IRA; lawsuit proceeds are non-qualified.

Retirement annuity: A general term, not a specific contract type.

Maryland suitability and disclosure relevance.

Maryland requires clear explanation of surrender periods and deferred income timing for SPDAs.

Conclusion.

The described contract is a single premium deferred annuity.

The Maryland Insurance Administration (MIA) is the regulatory body responsible for ensuring compliance with state insurance laws, including identifying unfair trade practices:

The Maryland Insurance Administration (A): Has statutory authority to examine insurers’ books and records to investigate potential violations and protect consumers.

National Association of Insurance Commissioners (B): Provides guidance but lacks enforcement powers in Maryland.

Federal Deposit Insurance Corporation (C): Regulates banks, not insurers.

PCIGC (D): Handles claims for insolvent insurers but does not investigate trade practices.

Understanding IRA transfers.

A direct transfer occurs when funds move directly from one IRA trustee or custodian to another, without the owner taking possession.

Tax treatment of direct IRA transfers.

Because the IRA owner never receives the funds, the IRS does not treat the transfer as a distribution.

There is:

No income tax

No early withdrawal penalty

No reporting as taxable income

Distinguish from rollovers.

A rollover may involve temporary receipt of funds and strict time limits.

A direct transfer avoids these risks entirely.

Evaluate each option.

A. Nontaxable event

Correct. Direct IRA-to-IRA transfers are tax-free.

B. Taxable event

Incorrect. No constructive receipt occurs.

C. Premature distribution

Incorrect. No distribution is made.

D. Required distribution

Incorrect. Required minimum distributions cannot be transferred.

Maryland relevance.

Maryland follows federal income tax treatment for IRA transfers.

Conclusion.

A direct IRA-to-IRA transfer is a nontaxable event.

What “beneficiary by class” means.

A class designation identifies beneficiaries by group description, not by individual names.

Examples include:

“Children of the insured”

“Surviving spouse”

How benefits are paid.

Members of the class who qualify at the insured’s death receive proceeds.

Shares are divided equally unless stated otherwise.

Evaluate each option.

A. Business life insurance

Incorrect. Class designation can be used in personal policies.

B. No primary beneficiary allowed

Incorrect. A class can be a primary beneficiary.

C. Individuals not named

Correct. The class is described, not named individually.

D. Unrelated beneficiaries

Incorrect. Class members are often family.

Maryland relevance.

Maryland recognizes class designations as valid beneficiary arrangements.

Conclusion.

A class designation means beneficiaries are not named individually.

What a non-qualified annuity is.

A non-qualified annuity is purchased with after-tax dollars, not through a qualified retirement plan (such as an IRA or 401(k)).

Tax treatment of annuity distributions.

Distributions are taxed under the interest-first (LIFO) rule, meaning:

Earnings are taxed first as ordinary income.

Principal (cost basis) is returned tax-free only after earnings are exhausted.

Age-based penalty rule.

If distributions are taken before age 59½, the taxable portion may be subject to:

Ordinary income tax, and

An additional 10% federal penalty tax, unless an exception applies.

Evaluate each option.

A. Fully taxable at all times

Incorrect. Only the earnings portion is taxable.

B. Must begin by age 70½

Incorrect. Required minimum distributions apply to qualified plans, not non-qualified annuities.

C. Before age 59½ may be subject to a penalty

Correct.

D. After age 59½ tax exempt

Incorrect. Earnings are still taxable as ordinary income.

Maryland tax conformity.

Maryland follows federal tax treatment for annuity distributions.

Conclusion.

Early distributions from non-qualified annuities may be subject to a penalty, making option C correct.

For life insurance, an insurable interest exists when there is a legitimate interest in the continued life of another person:

Marriage partners (C) inherently have insurable interest due to emotional and legal ties.

Competitors (A) and traveling companions (D) do not usually meet the legal threshold.

Business associates (B) may have insurable interest, but only in specific agreements (e.g., buy-sell agreements).

HIV testing is used by insurers to evaluate the health risks associated with the applicant and determine insurability.

The insurability of the proposed insured (D): Correct. HIV status can impact underwriting decisions, subject to Maryland’s anti-discrimination laws.

The type of policy issued (A): Irrelevant, as this is determined by the applicant’s preferences and eligibility.

Effective date and term of coverage (B): Determined separately from medical testing.

Whether an insurable interest exists (C): Based on the relationship between the policyholder and insured, not medical testing.

Definition of needs analysis.

Needs analysis is a planning method that evaluates:

Income replacement

Debts

Education funding

Final expenses

Survivor needs

Purpose of the method.

To determine how much life insurance is needed, not just whether insurance is needed.

Evaluate each option.

A. Identifies needs of the individual and dependents

Correct. This is the core function.

B. Eliminates future estimates

Incorrect. Inflation and interest must still be considered.

C. Requires underwriter participation

Incorrect. Needs analysis is done by the producer and client.

D. Ignores Social Security

Incorrect. Social Security benefits are included in analysis.

Maryland suitability relevance.

Needs analysis supports suitability and good-faith recommendations required by Maryland law.

Conclusion.

Needs analysis identifies the financial needs of the individual and dependents.

Maryland law requires that the results of medical examinations used to determine insurability:

Be disclosed to the physician of the applicant’s choice (B), but only if the applicant requests it.

This ensures privacy and confidentiality while giving the applicant access to critical information.

Beneficiaries (A) and underwriters (C) do not receive this information.

Physicians furnishing information (D) already have access to their own submissions.

When a group policy is issued to a labor union, Maryland law requires that eligibility criteria ensure fairness and inclusivity:

All of the members of the union (B): Eligible members must be treated equally under the group policy. Coverage cannot exclude individuals based on factors like age or health, provided they are active members.

Members of any union (A): Policies are issued to specific unions, not broadly.

Only members under age 65 (C): Age discrimination is prohibited unless specifically linked to policy provisions.

Healthy members (D): Group policies cannot discriminate based on health status.