Free Practice Questions for Insurance Licensing Life-Producer Exam

The doctrine of reasonable expectations ensures that ambiguities in insurance policies are resolved in favor of the policyholder:

Reasonable expectations (B): Protects policyholders by ensuring contracts are interpreted based on how an average person would understand them, especially when ambiguities exist.

Representation (A): Refers to the accuracy of statements made during application, unrelated to contract interpretation.

Retention (C): Concerns risk management, not contract ambiguities.

Retrocession (D): Deals with reinsurance, not policyholder rights.

Accelerated benefits allow a policyholder to receive a portion of the death benefit early, often due to terminal illness or specific qualifying conditions:

Decreases the death benefit (D): The accelerated amount reduces the death benefit available to beneficiaries.

Increases the cash value (A): Incorrect; accelerated benefits are drawn from the policy, reducing cash value and death benefits.

Increases the policy premium (B): Premiums generally remain unchanged.

Decreases the grace period (C): Not affected by accelerated benefits.

Who is a managing general agent (MGA).

A managing general agent is a person or entity that performs significant underwriting, policy issuance, or claims authority on behalf of an insurer.

MGAs act as an extension of the insurer, not the insured.

Licensing requirement in Maryland.

Maryland law requires MGAs to be properly licensed.

Acting as an MGA without a license is unlawful.

Contractual requirement.

Maryland requires a written agreement between the MGA and the insurer that clearly defines authority, duties, and limitations.

License renewal.

MGA licenses follow Maryland’s standard biennial renewal cycle, consistent with producer licensing.

Why option D is incorrect.

MGAs primarily represent the insurer, not the insured.

Representing the insured is the role of an agent or broker, not an MGA.

Conclusion.

The incorrect statement is that an MGA represents the insured.

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.

Unfair trade practices under Maryland Insurance Law.

Maryland Insurance Article Title 27 and related regulations prohibit misrepresentation, false advertising, and defamation in insurance transactions.

Evaluate each option.

A. Misrepresenting policy benefits

This is expressly prohibited and considered an unfair trade practice.

B. Misrepresenting insurance as shares of stock

This is a classic example of illegal misrepresentation under Maryland law.

C. Publishing false derogatory statements about an insurer’s financial condition

This constitutes defamation and is an unfair trade practice.

D. Sharing commissions with agents who have equivalent licenses

This is permitted in Maryland, provided all parties are properly licensed for the same line of insurance.

Conclusion.

Commission sharing among equally licensed agents is lawful and therefore not an unfair trade practice.

Meaning of the doctrine of reasonable expectations.

This doctrine holds that insurance policies should be interpreted according to the reasonable expectations of the average insured, even if strict legal wording might suggest otherwise.

Why this doctrine exists.

Insurance contracts are:

Complex

Drafted by insurers

Typically non-negotiable

Evaluate each option.

A. Indemnity

Restores the insured to pre-loss condition.

B. Comity

A legal courtesy between jurisdictions.

C. Reasonable expectations

Correct.

D. Subrogation

Allows insurer to recover from a responsible third party.

Maryland consumer protection relevance.

Maryland courts often construe ambiguities in favor of the insured, consistent with reasonable expectations.

Conclusion.

The applicable doctrine is reasonable expectations.

Definition of the law of large numbers.

This actuarial principle states that as the number of exposure units increases, actual losses will more closely match expected losses.

Why insurers rely on this law.

It allows insurers to:

Set accurate premiums

Maintain solvency

Spread risk efficiently

Evaluate each option.

A. Predictability is impaired

Incorrect; predictability improves.

B. Individual losses predicted

Incorrect; only group results are predictable.

C. Predictability improves

Correct.

D. Number of losses decreases

Incorrect; frequency does not necessarily decline.

Maryland solvency oversight relevance.

The Maryland Insurance Administration relies on actuarial predictability to ensure insurers remain financially sound.

Conclusion.

Increasing similar exposure units improves predictability of losses.

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.

Purpose of mortgage protection insurance.

Mortgage protection life insurance is designed to:

Pay off or reduce the mortgage balance if the insured dies.

Structure of most mortgage protection policies.

The death benefit typically decreases over time as the mortgage balance declines.

However, the premium usually remains level throughout the policy term.

Why level premiums are used.

Level premiums make budgeting easier for homeowners.

The insurer prices the policy based on average risk over the term.

Evaluate each option.

A. Remains level

Correct.

B. Increases every five years

Describes step-rate term insurance, not typical mortgage protection.

C. Increases every ten years

Not standard for mortgage protection.

D. Fluctuates with interest rate

Incorrect. Insurance premiums are not tied to mortgage interest rates.

Maryland consumer disclosure relevance.

Maryland requires producers to explain decreasing benefits and level premiums to avoid consumer confusion.

Conclusion.

Mortgage protection premiums typically remain level.

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.