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

Universal life insurance policies offer flexibility and adaptability, but they also have specific rules:

Minimum cash value vs. death benefit (A): Correct. IRS rules require a minimum difference to maintain tax-advantaged status.

Level or increasing death benefits (B): Correct. Policyholders can choose based on their needs.

Cash value withdrawals (C): Correct. Withdrawals are allowed but may incur surrender charges.

Automatic lapse (D): Incorrect. Universal life does not immediately lapse due to missed payments; instead, costs are deducted from the cash value, and the policy remains in force until the cash value is depleted.

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.

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.

Understanding life insurance replacement.

Policy replacement occurs when an existing policy is lapsed, surrendered, or exchanged for a new policy.

Maryland strictly regulates replacements to protect consumers from unnecessary financial harm.

Evaluate each option.

A. Capital gains taxation

Life insurance generally does not produce capital gains tax upon replacement.

B. Small business taxation

Not relevant to individual policy replacement.

C. An illegal transaction

Replacement is legal when properly disclosed and documented.

D. Surrender costs

Correct. Surrender charges may apply if the old policy is terminated early.

Maryland consumer protection context.

Maryland replacement regulations require producers to explain surrender charges, loss of benefits, and new contestability periods to ensure good-faith conduct.

Conclusion.

Policy replacement may result in surrender costs, making option D correct.

Maryland law requires insurance licensees to complete continuing education (CE) every two years (B) to maintain their licenses:

CE ensures that agents remain informed about current laws, practices, and products.

Each year (A): Too frequent for most state requirements, including Maryland.

Every three years (C): Exceeds Maryland’s regulatory timeframe.

No requirement (D): Incorrect, as CE is mandatory for license renewal.