Insurance Licensing Life-Producer - Maryland Life Producer Exam (Series 20-27)

A rollover IRA is used to defer taxes on qualifying distributions.

Proceeds from a life insurance policy (A) are generally not eligible for tax-deferred treatment.

Refunds from a refund life annuity (B) are considered taxable income and not eligible for rollover.

Amounts paid to a spouse under a tax-sheltered annuity (C) qualify for rollover treatment because they meet IRS rollover rules for deferred taxation.

IRAs inherited from parents (D) follow different tax rules and cannot be directly rolled over into a new IRA.

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).

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.

The needs approach assesses financial requirements to determine the appropriate amount of life insurance.

Covering unexpected expenses (B): Emergency reserve funds help beneficiaries handle unforeseen costs, such as urgent repairs, medical emergencies, or temporary loss of income.

College tuition and books (A): This falls under education funding needs, not emergency reserves.

Paying off mortgages (C): This is categorized as debt repayment, separate from the reserve fund.

Providing retirement income (D): This is a long-term goal that requires separate planning, not immediate financial reserves.

During the liquidation phase, an annuity pays out benefits to the annuitant based on the terms of the contract.

Benefit payments at regular intervals (B): Correct. These payments are structured as monthly, quarterly, or yearly installments based on the chosen payout option.

Cash withdrawals upon request (A): Relates to the accumulation phase, not liquidation.

A lump sum (C): Applies only if the annuity is structured for a single payout, not typical during the liquidation phase.

Nothing (D): Incorrect, as this phase is specifically for distributing payments.

Regulatory authority of the Maryland Insurance Administration (MIA).

The MIA is granted statutory authority to examine, investigate, and audit producers to ensure compliance with insurance laws.

Evaluate each option.

A. Court order required

Incorrect. The MIA has direct administrative authority.

B. NAIC authorization required

Incorrect. The NAIC is advisory, not regulatory.

C. Records must be produced upon request

Correct. Licensed producers are required to comply with MIA record requests.

D. No right due to privacy

Incorrect. Licensing carries an obligation to regulatory oversight.

Good-faith and compliance relevance.

Failure to provide records may itself constitute a regulatory violation and undermine good-faith conduct.

Conclusion.

Producers must produce business records upon request of the Maryland Insurance Administration.

Premature distributions from an Individual Retirement Account (IRA) before age 59½ are subject to a 10% penalty tax, in addition to regular income tax, unless an exception applies.

10% (B): Correct. This is the standard penalty for early withdrawals under IRS regulations.

5% (A): Too low and not applicable to IRA penalties.

20% (C): Refers to mandatory withholding for some plan distributions, not the penalty rate.

50% (D): Applies only to missed Required Minimum Distributions (RMDs), not early withdrawals.

Exceptions to the 10% penalty:

First-time homebuyers (up to $10,000).

Qualified education expenses.

Medical expenses exceeding a certain percentage of adjusted gross income (AGI).

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).

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.

Purpose of the Guaranty Corporation.

The Life and Health Insurance Guaranty Corporation protects policyholders when a licensed insurer becomes insolvent.

How the guaranty system is funded.

It is not funded by taxpayers.

It is not funded by policyholders directly.

Assessment mechanism.

Member insurers are assessed proportionally to cover obligations arising from insolvencies.

This spreads risk across the industry.

Why the other options are incorrect.

Raise premiums: Insurers may adjust pricing, but guaranty funding is not a premium increase mechanism.

State funds: No taxpayer funding.

Policyholders assessed: Consumers are protected, not charged.

Maryland solvency and good-faith relevance.

This structure supports consumer confidence and insurer accountability without burdening insureds.

Conclusion.

Guaranty Corporation funding comes from assessments on member insurers.