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

Purpose of nonforfeiture options.

Nonforfeiture options ensure that a policyowner does not lose all value if premiums stop.

Evaluate each option.

A. Endowment value option

Not a standard nonforfeiture option.

B. Extended term insurance option

Uses cash value to buy term insurance for the same face amount, not the same policy type.

C. Loan value option

Involves borrowing, not policy continuation.

D. Reduced paid-up insurance option

Correct. Uses net cash value to purchase a paid-up policy of the same type with a reduced face amount.

Maryland consumer protection relevance.

Maryland nonforfeiture requirements ensure policyholders retain fair value upon lapse.

Conclusion.

The reduced paid-up insurance option meets the description, making option D correct.

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.

Definition of single premium whole life insurance.

A single premium whole life policy is funded with one lump-sum premium payment at issue.

No additional premiums are ever required.

What the single premium accomplishes.

That one payment is actuarially calculated to:

Provide lifetime coverage, and

Build immediate cash value sufficient to support the policy for life.

Why other time periods are incorrect.

One month / one year: These describe term or annually renewable policies, not whole life.

To age 65: This describes limited-pay whole life, not single premium.

Maryland consumer protection relevance.

Maryland requires disclosure that single premium policies may trigger tax consequences and MEC status, reinforcing that the payment funds the entire policy duration.

Conclusion.

One premium payment covers the full life of the policy.

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.

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.

Basic contract law principles applied to insurance.

Maryland follows standard contract law elements: offer, acceptance, consideration, and legal purpose.

The first step in forming a contract is a clear and definite offer.

Evaluate each option.

A. Oral contract

A type of contract, not the proposal itself.

B. Binder

Temporary insurance coverage, not the proposal of terms.

C. Agreement

Occurs after an offer has been accepted.

D. Offer

Correct. An offer is a definite and unqualified proposal of contract terms.

Conclusion.

The correct legal term for such a proposal is an offer.

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.

Rebating occurs when an insurance producer offers a portion of their commission, premium reductions, or other inducements to buyers that are not explicitly stated in the policy. It is prohibited under Maryland law to ensure fair competition and maintain ethical standards.

Rebating (D): Involves returning part of the commission or providing benefits not in the policy to incentivize a sale, violating Maryland Insurance Article §27-212.

Twisting (A): Refers to persuading a policyholder to lapse or replace a policy through misrepresentation, unrelated to commission-sharing.

Binding (B): Relates to confirming coverage but does not involve commissions.

Soliciting (C): Refers to seeking potential clients, not the unfair practice of rebating.

Purpose of the free look period.

The free look period allows the policyowner to review the policy after delivery.

Consumer protection function.

Maryland law requires a minimum free look period (commonly 10 days).

If cancelled within this time, the policyowner receives a full refund.

Why the other options are incorrect.

Discovery period: Related to claims-made policies.

Probationary period: Often associated with health insurance waiting periods.

Grace period: Allows late premium payment, not cancellation.

Conclusion.

The correct provision is the free look period.