These twenty questions come from eighteen sections of the official Maryland outline. Answer each one in your head first, then reveal the correct choice and the reason behind it.
Question 1 of 20
Licensing
The Maryland Insurance Commissioner may deny, suspend, or revoke a producer's license for which of the following reasons?
- A. Providing incorrect information on a license application intentionally
- B. Writing more policies than a competitor
- C. Charging the standard premium set by the insurer
- D. Referring a client to another licensed producer
+Reveal answer
Answer: A. Providing incorrect information on a license application intentionally
Intentionally providing false information on a license application is grounds for disciplinary action against the license. Outselling a competitor, charging the insurer's set premium, and referring a client to another licensed producer are all lawful, ordinary activities and are not grounds for discipline.
Md. Code, Insurance Article, Sec. 10-126 (grounds for denial, suspension, revocation)
Question 2 of 20
State regulation
A producer tells a prospect that a competitor's insurer is about to go bankrupt when that is untrue, in order to steal the sale; what unfair trade practice is this?
- A. Defamation of an insurer
- B. Twisting
- C. Coercion
- D. Misrepresentation of policy terms
+Reveal answer
Answer: A. Defamation of an insurer
Making false or malicious statements about another insurer's financial condition is defamation. Twisting is convincing someone to replace an existing policy through misleading statements, which is different. Coercion involves pressure or force, such as tying a loan to buying insurance. Misrepresentation of policy terms means lying about a policy's own features, not about a competitor's solvency.
Md. Code, Insurance Article, Title 27 (Unfair Trade Practices, defamation)
Question 3 of 20
State insurance requirements
Maria drops her whole life policy with one insurer and buys a new one from another company; what is this transaction called?
- A. An external replacement
- B. An internal replacement
- C. A conversion
- D. A reinstatement
+Reveal answer
Answer: A. An external replacement
When the new policy comes from a different insurer than the old one, it is an external replacement. An internal replacement is when the same insurer issues both policies, so the second is wrong. Conversion changes one form of coverage to another with the same insurer, so the third is wrong. Reinstatement restores a lapsed policy, not replacing it, so the fourth is wrong.
COMAR 31.09.06 (definitions of replacement)
Priya keeps a small emergency fund to pay for minor repairs instead of filing insurance claims, but she still buys a policy for large losses. What are the two risk methods she is combining?
- A. Avoidance and transfer
- B. Retention and transfer
- C. Reduction and avoidance
- D. Sharing and reduction
+Reveal answer
Answer: B. Retention and transfer
Priya retains the small risks by paying for minor repairs herself and transfers the large risks to the insurer by buying a policy. Avoidance would mean giving up the activity entirely, which she is not doing. Reduction means lowering the chance of loss, which is not described. Sharing and reduction do not match paying small losses out of pocket while insuring big ones.
General Insurance Concepts - methods of handling risk
Question 5 of 20
Producers and general rules of agency
An insurer gives producer Maria Lopez company business cards, letterhead, and rate books, leading a customer to believe she can bind coverage even though her contract forbids it; which authority is the customer relying on?
- A. Apparent authority
- B. Express authority
- C. Implied authority
- D. Void authority
+Reveal answer
Answer: A. Apparent authority
Apparent authority arises when the insurer's own actions cause a reasonable customer to believe the producer has powers she does not actually have. Express authority is only what the contract grants, and here the contract forbids binding. Implied authority relates to acts needed to perform express duties, not powers the customer merely believes exist. Void authority is not a real term.
General rules of agency (express, implied, apparent authority) as tested in the Maryland producer outline.
Question 6 of 20
Contracts
Which of the following is a required element for a valid insurance contract?
- A. A licensed witness to the signing
- B. Consideration exchanged by both parties
- C. A medical exam for every applicant
- D. Notarization of the application
+Reveal answer
Answer: B. Consideration exchanged by both parties
A valid contract requires offer and acceptance, consideration, competent parties, and legal purpose. Consideration is the value each side gives: the applicant pays premium and the insurer promises to pay claims. A witness, a mandatory medical exam, and notarization are not legal elements of a contract.
General Insurance outline: Contracts (elements)
Question 7 of 20
Federal regulation
Under the federal Fair Credit Reporting Act, what must an insurer do before obtaining a consumer report on an applicant for life insurance?
- A. Get written permission from the applicant's employer
- B. Provide notice to the applicant that a consumer report may be obtained
- C. File a copy of the report with the state insurance department
- D. Wait 30 days after taking the application
+Reveal answer
Answer: B. Provide notice to the applicant that a consumer report may be obtained
FCRA requires that the applicant be notified in advance that a consumer report may be requested and used. Getting permission from the employer is wrong because the applicant, not the employer, is the subject of the report. Filing with the state is not required by FCRA. There is no mandatory 30 day waiting period under FCRA.
Fair Credit Reporting Act, 15 U.S.C. 1681 et seq. (notice requirement)
Question 8 of 20
Industry associations
The NAIC develops documents that states may choose to adopt into their own law. What are these documents called?
- A. Federal statutes
- B. Model laws and regulations
- C. Binding national rules
- D. Court opinions
+Reveal answer
Answer: B. Model laws and regulations
The NAIC creates model laws and model regulations that individual states can adopt, modify, or reject. They are not federal statutes because the NAIC is not Congress. They are not binding until a state adopts them, so 'binding national rules' is wrong. They are not court opinions, the NAIC is not a court.
General Insurance > Industry associations (NAIC)
Question 9 of 20
Insurable interest
Why does the law require insurable interest before allowing someone to buy life insurance on another person?
- A. To prevent life insurance from being used as a wager or gambling on a stranger's death
- B. To make sure premiums are always affordable
- C. To guarantee the insurer earns a profit
- D. To limit how many policies an agent can sell
+Reveal answer
Answer: A. To prevent life insurance from being used as a wager or gambling on a stranger's death
Insurable interest laws exist to stop people from profiting from a stranger's death, which would turn insurance into gambling and create a dangerous incentive. Affordability, insurer profit, and agent sales limits are unrelated policy goals.
Life Insurance Basics > Insurable interest (concept)
Question 10 of 20
Personal uses of life insurance
What does the term 'living benefits' of a life insurance policy refer to?
- A. The death benefit paid to a beneficiary
- B. Values the policyowner can use while still alive, such as cash value and loans
- C. The dividends paid to the insurer's shareholders
- D. The premium refund at the end of the grace period
+Reveal answer
Answer: B. Values the policyowner can use while still alive, such as cash value and loans
Living benefits are the features an insured can access during life, such as cash value, policy loans, and certain accelerated benefits. The death benefit is paid after death, not a living benefit. Dividends to shareholders are not a policy feature for the owner. A premium refund at the grace period end is not a defined living benefit.
Life Insurance Basics outline > Personal uses of life insurance
Question 11 of 20
Viatical/Life settlements
Kevin, an investor, is offered a chance to buy a life insurance policy on a stranger who was paid to take out the policy solely so it could be sold. What is this arrangement called?
- A. A standard viatical settlement
- B. A stranger-originated life insurance transaction
- C. A qualified accelerated benefit
- D. A group conversion policy
+Reveal answer
Answer: B. A stranger-originated life insurance transaction
When a policy is created for the purpose of selling it to investors who have no insurable interest, it is called stranger-originated life insurance (STOLI), which is prohibited. A standard viatical settlement involves a policy the viator already owned for a legitimate reason. An accelerated benefit is a living benefit paid by the insurer, not an investor purchase. A group conversion involves changing a group certificate to an individual policy.
Md. Code, Insurance Article, Title 8, Subtitle 6 (prohibited STOLI practices)
Question 12 of 20
Determining amount of personal life insurance
Which approach to determining life insurance need starts by adding up the family's expenses and financial obligations that must be met after the insured dies?
- A. Needs approach
- B. Human life value approach
- C. Cash value approach
- D. Income replacement ratio approach
+Reveal answer
Answer: A. Needs approach
The needs approach totals the family's obligations, such as final expenses, debts, mortgage, education, and ongoing income needs, to decide how much coverage is required. The human life value approach is wrong because it focuses on the insured's future earnings, not the family's expenses. Cash value refers to a policy feature, not a way to size coverage. Income replacement ratio is not a formal needs-analysis method taught here.
Life Insurance Basics: Determining amount of personal life insurance (needs approach)
Question 13 of 20
Classes of life insurance policies
A lender requires Susan to buy coverage that pays off her car loan if she dies before the loan is repaid; what class of insurance is this?
- A. Whole life insurance
- B. Credit life insurance
- C. Group universal life
- D. Variable life insurance
+Reveal answer
Answer: B. Credit life insurance
Credit life is designed to pay off a specific debt if the borrower dies, matching the loan payoff purpose. Whole life is general permanent coverage not tied to a loan. Group universal life is employer-based permanent coverage. Variable life is investment-based permanent coverage, not debt protection.
Life Insurance Basics > Classes of life insurance policies
Question 14 of 20
Premiums
In life insurance premium calculation, higher assumed interest earnings on invested premiums generally have what effect on the premium?
- A. They lower the premium
- B. They raise the premium
- C. They have no effect on premium
- D. They eliminate the mortality charge
+Reveal answer
Answer: A. They lower the premium
Interest is a credit in pricing: the more the insurer expects to earn on invested premium dollars, the less it needs to collect up front, so the premium goes down. Raising the premium is the opposite of what interest earnings do. Interest is one of the three core factors, so it clearly affects premium. Mortality is a separate factor and interest assumptions do not remove it.
Life Insurance Basics > Premiums - concept
Question 15 of 20
Producer responsibilities
A producer's advertisement for a life policy in Maryland must meet which basic standard?
- A. It must not be untrue, deceptive, or misleading
- B. It must guarantee a minimum rate of return
- C. It must be approved by the applicant before use
- D. It may omit the insurer's name to protect privacy
+Reveal answer
Answer: A. It must not be untrue, deceptive, or misleading
Advertising rules require that ads be truthful and not deceptive or misleading. Ads cannot guarantee returns that are not actually guaranteed. Applicant approval is not required for an ad to be used. Ads generally must identify the insurer, not conceal it.
Concept: Life insurance advertising standards (Maryland adopts NAIC advertising rules)
Question 16 of 20
Individual underwriting by the insurer
A rating that is better than standard, given to a very healthy applicant with an excellent lifestyle, is known as what class?
- A. Substandard
- B. Declined
- C. Preferred
- D. Rated
+Reveal answer
Answer: C. Preferred
A preferred class is offered to applicants healthier than average and results in lower premiums. Substandard means higher-than-average risk and higher premiums. Declined means the insurer will not offer coverage. Rated is another way to describe a substandard risk with an added premium.
Life Insurance Basics > Individual underwriting (risk classification)
Question 17 of 20
Term life insurance
What does the renewability feature of a term policy allow the insured to do?
- A. Convert the policy to a whole life policy
- B. Continue the term coverage for another term without proving insurability
- C. Cash in the policy for its accumulated value
- D. Increase the face amount at any time without limit
+Reveal answer
Answer: B. Continue the term coverage for another term without proving insurability
Renewability lets the insured keep the term coverage for a new term without a new medical exam or proof of good health. Converting to permanent insurance is the convertibility feature, not renewability, so the first choice is wrong. Term has no cash value to cash in, so the third choice is wrong. Renewability does not grant unlimited face increases, so the fourth choice is wrong.
Life Insurance Policies > Term life insurance (concept)
Question 18 of 20
Whole life insurance
Which feature is a defining characteristic of a whole life insurance policy?
- A. Coverage lasts only for a set number of years
- B. It builds cash value and provides lifetime coverage if premiums are paid
- C. It offers no cash value at any point
- D. Premiums always increase every year
+Reveal answer
Answer: B. It builds cash value and provides lifetime coverage if premiums are paid
Whole life provides permanent coverage for the insured's entire life and accumulates a guaranteed cash value. Coverage for a set number of years describes term insurance. Whole life does build cash value, so the third choice is wrong. Traditional whole life has level premiums, not annually increasing ones.
Life Insurance Policies outline: Whole life insurance
Question 19 of 20
Licensing
When an insurer terminates a producer's appointment in Maryland, it must notify the Commissioner within a period set by law and must include the reason if the termination was for cause. This notification requirement exists mainly to:
- A. Allow the producer to appeal the termination automatically
- B. Keep the regulator informed so misconduct can be tracked
- C. Give the insurer a tax deduction
- D. Require the producer to return unearned commissions
+Reveal answer
Answer: B. Keep the regulator informed so misconduct can be tracked
The termination notice keeps the Commissioner informed, especially when a producer is terminated for cause, so patterns of misconduct can be tracked across the industry. Notification does not create an automatic appeal, is unrelated to taxes, and does not itself govern commission repayment.
Md. Code, Insurance Article, Sec. 10-118 (notification of termination); day count stated as concept because the exact reporting period should be verified against current statute
Question 20 of 20
State regulation
What is the name of the state agency that regulates insurance in Maryland?
- A. The Maryland Insurance Administration
- B. The Maryland Department of Commerce
- C. The Maryland Bureau of Financial Institutions
- D. The Maryland Insurance Guaranty Board
+Reveal answer
Answer: A. The Maryland Insurance Administration
Maryland's insurance regulator is the Maryland Insurance Administration (MIA), led by the Insurance Commissioner. The Department of Commerce handles business development, not insurance oversight. The Bureau of Financial Institutions regulates banks and lenders. The Guaranty Board is not the regulator; guaranty associations only pay claims of insolvent insurers.
Md. Code, Insurance Article, Title 2 (Maryland Insurance Administration)