Life-Producer Sample Questions Answers

The taxable portion of benefit payments under a life income settlement option depends on the beneficiary’s life expectancy:

Life expectancy impacts (B) how the payments are taxed, as longer payment durations result in more taxable income over time.

The policy’s inclusion in the estate (A) is unrelated to the beneficiary’s life expectancy.

The total death benefit (C) is fixed and not influenced by the beneficiary’s lifespan.

Premium rates (D) are determined during underwriting, not affected by beneficiary life expectancy.

Maryland law mandates that life insurance policies include a clear and concise description of the policy on the first page to ensure transparency and understanding for policyholders.

Legible and brief description (A): Correct. This ensures the buyer can quickly identify key terms and benefits of the policy.

Notary seal (B): Not required for delivering life insurance policies.

Premium coupon book (C): Optional, often replaced with digital billing methods.

Financial statement of the insurer (D): Not required in the policy itself, although insurers must provide financial stability information upon request.

Universal life insurance is a flexible product that combines features of term insurance and a savings component:

Flexible premium deposit fund and a monthly renewable term insurance policy (D): Universal life allows policyholders to adjust premiums and coverage amounts. The policy includes a savings element (cash value) and provides renewable term insurance protection.

Mutual fund and whole life insurance policy (A): Incorrect, as universal life does not involve mutual funds or strict whole life coverage.

Term insurance and an annuity (B): Universal life lacks the payout structure of an annuity.

Endowment and interest-sensitive deposit fund (C): While it includes interest-sensitive growth, it is not structured as an endowment policy.

A “period certain” provision ensures payment for a specified period regardless of whether the annuitant survives:

Period certain (B) guarantees payments for a set number of years, protecting beneficiaries.

Cost recovery (A) and refund options (C and D) relate to refunding premiums or unpaid amounts but do not guarantee a payment period.

Definition of annuity replacement.

Replacement occurs when an existing annuity is surrendered, lapsed, or terminated and replaced with a new annuity.

Why replacements are regulated.

Replacements may trigger:

Surrender charges

Loss of benefits

Restart of surrender periods

Maryland disclosure requirements.

Producers must disclose all consequences of annuity replacement to comply with good-faith and suitability rules.

Why the other options are incorrect.

Conversion: Applies to term-to-permanent policies.

Continuation: Keeping the same contract.

Reinstatement: Restoring a lapsed policy.

Conclusion.

Terminating one annuity and issuing another is a replacement.

When a death claim is filed on a life insurance policy with an outstanding loan:

Deducted from the face amount (A): The death benefit is reduced by the loan balance plus any accrued interest, ensuring the insurer recovers the outstanding debt.

Beneficiary obligation (B): Incorrect. The beneficiary receives the adjusted benefit without personal liability for the loan.

Claim against the estate (C): Incorrect. The loan is tied to the policy, not the estate.

Canceled without adjustment (D): Incorrect, as insurers must recoup the loan amount from the death benefit.

Producer duties at policy delivery.

Maryland law and good-faith standards require producers to explain coverage, ratings, and policy features to ensure the applicant understands the contract.

Evaluate each option.

A. Explaining a non-standard rating

Required to ensure transparency and informed consent.

B. Reviewing policy riders

A normal and expected delivery duty.

C. Collecting the premium payment

Permissible and common.

D. Cashing the insured’s premium check

Not permitted. Premium checks must be forwarded to the insurer, not negotiated by the producer.

Conclusion.

Cashing a client’s premium check is improper and violates fiduciary responsibilities.

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.

Insurance licensing ensures agents meet professional standards:

Licensure demonstrates qualifications (B) to act ethically and competently on behalf of insurers.

It does not limit the number of agents (A).

Sales activity monitoring (C) and rate regulation (D) are separate regulatory functions.

Under Maryland insurance law, a terminated employee has 31 days (D) to convert a group term life insurance policy into an individual policy without providing evidence of insurability.

This grace period allows individuals to maintain coverage while securing individual insurance.

10 (A), 20 (B), or 30 days (C) are incorrect, as Maryland mandates a specific 31-day window.

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).

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.

An insurable risk must meet specific criteria to ensure fair and financially viable coverage:

Chance of loss must be calculable (C): Correct. Insurers need statistical data to assess risk and determine premiums.

Loss must be intentional (A): Incorrect; intentional losses are not insurable.

Loss must be catastrophic (B): Incorrect; catastrophic losses (e.g., war or large-scale disasters) are often excluded or managed through reinsurance.

Large number of different loss exposures (D): A large number of similar, not different, exposures is required for risk pooling.

Participating life insurance policies, often issued by mutual companies, include the possibility of dividends:

Dividends (A) represent a share of surplus profits distributed to policyowners.

Policyowners are not assessed for losses (B); the insurer bears those.

The insured and policyowner can be different individuals, making (C) incorrect.

Mutual insurers typically issue participating policies, not stock companies (D).

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.

Definition of juvenile life insurance.

Juvenile life insurance provides coverage on the life of a minor, typically owned by a parent or guardian.

Evaluate each option.

A. Insures parents

Incorrect. Juvenile policies insure the child.

B. Limited to under age five

Incorrect. Coverage is available for a broader age range.

C. Insures the life of a minor

Correct. This is the precise definition.

D. Only decreasing term

Incorrect. Juvenile policies may be term or permanent.

Maryland consumer protection relevance.

Juvenile policies are regulated to ensure insurable interest and appropriate ownership by adults.

Conclusion.

A juvenile life insurance policy insures the life of a minor.

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.

Insurance licensees in Maryland are required to report certain changes to the Maryland Insurance Administration (MIA):

Change of name (A): Must be reported promptly to ensure accurate licensure records.

Change of residence address (B): Also required for communication and compliance purposes.

Felony convictions (D): Mandatory disclosure to maintain transparency and evaluate fitness for licensure.

Change in financial status (C): Not required unless it directly affects the licensee’s ability to meet financial obligations tied to the license (e.g., bonding requirements).

Purpose of a deferred annuity.

A deferred annuity is designed primarily for long-term accumulation, most commonly for retirement income planning.

Two phases of a deferred annuity.

Accumulation period: Premiums are paid and interest accumulates on a tax-deferred basis.

Annuity (payout) period: Income payments begin.

Timing of income benefits.

Unlike immediate annuities, deferred annuities are intended to begin income at a future date chosen by the owner, often many years later (e.g., at retirement age).

Evaluate each option.

A. Upon death

Incorrect. Death benefits may be paid, but this is not the intent of income benefits.

B. Upon beneficiary request

Incorrect. Beneficiaries receive death benefits, not scheduled annuity income.

C. Within several weeks

This describes immediate annuities, not deferred annuities.

D. On a specified date often years after issuance

Correct. This reflects the core purpose of a deferred annuity.

Maryland suitability relevance.

Maryland requires producers to recommend annuities consistent with the consumer’s time horizon and income needs, which is why deferred annuities are matched to future income goals.

Conclusion.

Deferred annuity income is intended to begin on a specified future date, often years later.

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.

Legal capacity to contract.

Maryland contract law requires parties to have legal capacity to enter into a binding agreement.

Evaluate each option.

A. Intoxicated individuals

May lack capacity if intoxication impairs understanding.

B. Mentally ill individuals

May lack capacity depending on severity and adjudication.

C. Minors

Generally lack full contractual capacity.

D. Retired individuals

Retirement status does not affect legal capacity.

Insurance relevance.

Producers must ensure applicants have legal capacity to avoid voidable contracts.

Conclusion.

Retired individuals have full contractual capacity, making option D correct.

A flexible premium fixed annuity allows policyholders to make varying contributions while offering tax-deferred growth and a guaranteed minimum interest rate.

Flexible premium fixed annuity (C): Correct. Combines flexible payments with guaranteed returns and death proceeds equal to cash value.

Adjustable whole life (A): Involves fixed payments and lacks tax-deferred features.

Available deferred annuity (B): Vague and not specifically tied to these features.

Universal life (D): Provides death benefits but lacks guaranteed minimum interest rates.

Definition of twisting under Maryland insurance law.

Twisting occurs when a producer knowingly makes misrepresentations or incomplete comparisons to induce a policyowner to lapse, surrender, or replace an existing policy.

Apply the facts of the scenario.

The producer knowingly misrepresented facts.

The goal was to convince the applicant to give up an existing policy and buy a replacement policy.

Why the other options are incorrect.

Fraud is broader and often involves criminal deception; twisting is the specific insurance violation described here.

Discrimination involves unfair treatment between insureds of the same class.

Rebating involves illegal inducements such as returning part of a premium.

Conclusion.

This conduct fits precisely within the definition of twisting, which is prohibited in Maryland.

What a class designation means.

A class designation identifies beneficiaries by category, not by individual names.

Common class examples include:

“Children of the insured”

“Surviving spouse”

Why class designations are used.

Allows flexibility when:

Family composition may change

Children are born after policy issuance

The insured wants automatic inclusion of qualifying members

Evaluate each option.

A. Naming children without naming them individually

Correct. This is the textbook example of a class designation.

B. Charity

A charity must be named specifically.

C. Trust fund

A trust must be named as a legal entity.

D. Specific beneficiary on behalf of a group

This is not a class designation.

Maryland beneficiary rules.

Maryland recognizes class designations as valid if clearly defined and not ambiguous.

Conclusion.

A class designation is properly used to name children as beneficiaries without listing them individually.

Purpose of the needs approach.

The needs approach calculates the amount of life insurance needed to meet specific financial obligations upon the insured’s death.

Apply the concept.

It considers income replacement, debts, education costs, and final expenses.

Evaluate each option.

A. Types of individuals

Prospecting issue, not a needs analysis.

B. Amount of life insurance

Correct. This is the primary use of the needs approach.

C. Best companies

Product selection issue, not needs-based.

D. Prospecting method

Sales strategy, not needs-based.

Maryland suitability relevance.

Maryland requires producers to make suitable recommendations, and the needs approach supports suitability and good faith.

Conclusion.

The needs approach is used to determine how much insurance to recommend.

Criminal vs. administrative violations.

Not all insurance violations are crimes.

Criminal penalties apply when conduct involves fraud, theft, or embezzlement.

Define embezzlement.

Embezzlement involves misappropriating funds entrusted to the producer, such as:

Premium payments

Trust account funds

Evaluate each option.

A. Selling with a nonresident license

Typically an administrative violation, not a felony.

B. Embezzling money

Correct. This is a federal and state crime punishable by imprisonment.

C. Inducing a client to sign an application

Lawful solicitation activity.

D. Suing an insurer

A legal right, not a crime.

Maryland enforcement context.

Embezzlement may result in:

License revocation

Criminal prosecution

Restitution orders

Conclusion.

Embezzlement can result in prison sentencing.

A flexible premium fixed annuity is designed to allow policyholders flexibility in premium payments while providing guaranteed growth.

Flexible deposits: Policyholders can make variable contributions based on their financial situation.

Deferred taxation: Earnings grow tax-deferred until withdrawal.

Guaranteed minimum interest rate: Fixed annuities offer this feature to protect against market downturns.

Death proceeds equal to cash value: Upon death, beneficiaries typically receive the accumulated cash value.

Other Options:

Adjustable whole life policy (A): Features adjustable premiums but lacks deferred taxation and guaranteed rates.

Deferred annuity (B): Generic and does not specify the features of fixed annuities.

Universal life (D): Provides more flexibility but differs in guaranteed returns.

The IRS allows a penalty-free distribution of up to $10,000 from an IRA for qualified first-time homebuyers, provided the funds are used for eligible home purchase expenses.

$10,000 (C): Correct. This is the lifetime maximum allowed per participant.

$2,000 (A) and $5,000 (B): Too low for the current IRS rules.

$20,000 (D): Exceeds the limit and is incorrect.

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.

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.

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.

Purpose of the automatic premium loan provision.

The APL provision prevents unintentional policy lapse due to nonpayment of premium.

How the APL works.

If a premium is not paid by the end of the grace period:

The insurer automatically makes a policy loan

The loan amount equals the unpaid premium

The loan is secured by the policy’s cash value

Why the other options are incorrect.

A. Additional insurance: Describes paid-up additions, not APL.

B. Bank loans: APL uses internal policy loans.

C. Waiver of premium: A separate rider, not APL.

Maryland disclosure relevance.

Producers must explain that APL loans accrue interest and reduce cash value and death benefits.

Conclusion.

The APL provision uses a policy loan to pay overdue premiums.

General rule regarding premium payment and policy effectiveness.

Under Maryland insurance practice, life insurance coverage does not become effective unless the initial premium is paid, unless a valid conditional receipt provides otherwise.

Apply the facts of the question.

The question specifically states that the initial premium does not accompany the application.

Therefore, no temporary or conditional coverage is in force.

Evaluate each option.

A. 12:01 a.m. on the first day of the month

Arbitrary and not tied to policy issuance or premium payment.

B. When the application is completed and signed

Incorrect, because acceptance and premium payment are still required.

C. When the producer delivers the policy and collects the premium

Correct. Coverage normally begins upon policy delivery and premium payment.

D. One week after inspection report

No legal or regulatory basis.

Maryland consumer protection context.

Maryland requires clear disclosure of when coverage begins to prevent misunderstandings and bad-faith disputes.

Conclusion.

Coverage normally begins when the policy is delivered and the premium is collected.

Definition of insurable risk.

An insurable risk must meet certain criteria so insurers can predict losses and set premiums fairly.

Required elements of an insurable risk.

Accidental loss: Loss must be unintended and fortuitous.

Definite and measurable loss: The amount and timing of loss must be determinable.

Large number of similar exposures: Allows insurers to use the law of large numbers.

Non-catastrophic to the insurer: Losses must not affect all policyholders at once.

Why speculative risk is excluded.

Speculative risks involve the possibility of gain or loss (e.g., gambling or investing).

Insurance only covers pure risks, which involve the possibility of loss or no loss, but no gain.

Evaluate each option.

A. Speculative risk

Incorrect for insurability and therefore the correct answer.

B. Accidental loss

Required element.

C. Large number of similar units

Required for actuarial predictability.

D. Ability to measure the loss

Required to determine claim amounts.

Conclusion.

Speculative risk is not insurable, making option A 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).

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.

The Life and Health Insurance Guaranty Corporation provides financial protection to policyholders:

Guarantees benefits in case of insurer insolvency (C), ensuring policyholders do not lose coverage.

It does not guarantee the issuance of policies (A and B), as policy issuance depends on underwriting.

It cannot ensure an insurer will never fail (D) but mitigates the impact of failure.

The life insurance buyer’s guide is designed to help potential policyholders make informed decisions about life insurance by:

Explaining how to decide how much life insurance to buy (C), ensuring individuals purchase adequate coverage for their needs.

Providing details to compare life insurance policy requirements (D) to evaluate and choose the best policy.

Showing how to compare rates (A) for different policies to find cost-effective options.

However, it does not include instructions for taking civil action against an insurer (B). Such legal matters fall outside the scope of the guide and are addressed in regulatory and legal channels.

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.

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.

Definition of twisting.

Twisting involves misrepresentation or incomplete comparisons designed to induce replacement of an existing policy.

Apply the facts.

The producer:

Makes an incomplete comparison

Encourages cancellation of an existing policy

Promotes purchase of a new policy

Why this is twisting specifically.

Twisting is a replacement-related unfair trade practice, not just general misrepresentation.

Why other options are incorrect.

Rebating: Involves financial inducements.

Coercion: Involves intimidation or threats.

Defamation: Involves false statements about another insurer’s reputation.

Maryland enforcement relevance.

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

Conclusion.

The conduct described is twisting.

During the liquidation (or payout) phase of an annuity, the annuitant receives periodic payments:

The annuitant (D) is the individual designated to receive the payments, as they are the insured party in the contract.

The owner (A) is often the annuitant but may differ; the owner controls the contract but does not necessarily receive payments.

The beneficiary (B) receives the death benefit if the annuitant passes away, not the periodic payments.

"Nominator" (C) is not relevant terminology in annuities.