Maryland Life Insurance Practice Exam Free - 2026

• A. Refuse the cancellation because the free-look period is only 5 days
• B. Cancel the policy and return a pro rata premium for the unexpired term
• C. Cancel the policy but keep the first month's premium as an administrative fee
• D. Cancel the policy only if the client returns it within 30 days

Correct answer: B. Cancel the policy and return a pro rata premium for the unexpired term

Explanation: Maryland gives the policyholder 10 days after delivery of a life policy or annuity contract to surrender it by written notice, and the insurer must return a pro rata premium for the unexpired term. Option A is wrong because the statutory period is 10 days, not 5. Option C is wrong because no administrative fee may be retained; a pro rata refund is required. Option D is wrong because the right lasts 10 days, not 30. See Md. Code, Ins. § 16-105.

• A. 30 days; the policy stays in force and the overdue premium may be deducted from the proceeds
• B. 10 days; the policy stays in force but no benefit is paid until the premium is received
• C. 31 days; the policy lapses and only the cash value is paid
• D. 60 days; the policy stays in force with no deduction of any kind

Correct answer: A. 30 days; the policy stays in force and the overdue premium may be deducted from the proceeds

Explanation: Maryland requires a grace period of 30 days (or, at the insurer's option, 1 month of not less than 30 days) for every premium after the first, during which the policy continues in full force; if a claim arises during the grace period, any premium due or overdue may be deducted from the proceeds. Option B uses a 10-day period that applies only to monthly health policies. Option C is wrong because the policy does not lapse during the grace period. Option D overstates the period and ignores the permitted deduction. See Md. Code, Ins. § 16-202.

• A. Yes, because material misstatements can be raised at any time
• B. Yes, because the contestable period in Maryland is 5 years
• C. No, because the policy became incontestable after 2 years in force during the insured's lifetime, except for nonpayment of premium
• D. No, because Maryland policies are incontestable from the date of issue

Correct answer: C. No, because the policy became incontestable after 2 years in force during the insured's lifetime, except for nonpayment of premium

Explanation: Maryland life policies must be incontestable, except for nonpayment of premiums, after they have been in force during the lifetime of the insured for 2 years from the date of issue. Option A is wrong because the incontestability clause bars challenges to validity after 2 years. Option B states the wrong period. Option D is wrong because the insurer can contest during the first 2 years. See Md. Code, Ins. § 16-203.

• A. Reinstatement is available only within 1 year of default and requires no evidence of insurability
• B. Reinstatement is available within 5 years of default with payment of back premiums only
• C. Reinstatement is not available once a policy has lapsed for more than 1 year
• D. Reinstatement is available within 3 years of default on written application, evidence of insurability, and payment of overdue premiums with interest not exceeding 6% per year

Correct answer: D. Reinstatement is available within 3 years of default on written application, evidence of insurability, and payment of overdue premiums with interest not exceeding 6% per year

Explanation: Maryland life policies (other than industrial) must allow reinstatement within 3 years after the first missed premium if the insurer receives a written application, evidence of insurability acceptable to it, and payment of all overdue premiums with interest capped at 6% per year and any other policy debt. Option A is wrong on both the period and the insurability requirement. Option B is wrong because the period is 3 years and interest may be charged. Option C is wrong because a 2-year lapse is well within the 3-year window. See Md. Code, Ins. § 16-210.

• A. Both riders pay him identical monthly cash benefits
• B. Waiver of premium keeps the policy in force without premium payments, while the disability income rider pays him a monthly income, typically limited to a percentage of the face amount
• C. The disability income rider waives his premiums, while waiver of premium pays him monthly income
• D. Both riders merely suspend the policy until he recovers, with no cash paid and no coverage in force

Correct answer: B. Waiver of premium keeps the policy in force without premium payments, while the disability income rider pays him a monthly income, typically limited to a percentage of the face amount

Explanation: Waiver of premium excuses premium payments during total disability so the coverage continues, but it puts no cash in the insured's pocket. The separate disability income rider 'provides a monthly income while you are totally disabled after an initial waiting period, with the monthly disability income benefit limited to a percentage of the death benefit' (New York DFS consumer guidance). Option C reverses the two riders' functions.

• A. The guaranteed insurability rider, permitting additional purchases at specified dates or events with no new evidence of insurability
• B. The accidental death benefit rider
• C. The cost of living rider, which adjusts coverage only for inflation
• D. The accelerated death benefit rider

Correct answer: A. The guaranteed insurability rider, permitting additional purchases at specified dates or events with no new evidence of insurability

Explanation: The guaranteed insurability (guaranteed purchase option) rider lets the insured 'increase your death benefit at certain times without a medical exam' - typically at stated ages or life events such as marriage or the birth of a child (NAIC consumer guidance; California DOI guide). Because insurability is locked in at issue, later health changes cannot block the additional purchases. The cost of living rider tracks an index rather than her life events, and the other riders do not add coverage at all.

• A. Paid-up additions
• B. Accumulate at interest
• C. One-year term
• D. The cash option

Correct answer: D. The cash option

Explanation: The cash option simply has the insurer send the declared dividend to the policyowner as a check, giving Arthur spendable funds each year. Paid-up additions and one-year term convert the dividend into additional insurance, and accumulate at interest leaves the money on deposit with the insurer - none of those puts cash in his hands. Dividends are a return of the policyowner's share of divisible surplus (NAIC glossary).

• A. The insurer applies the $300 against the premium due, and Beth pays the remaining $1,500 out of pocket
• B. The insurer bills the full $1,800 and mails Beth a $300 check afterward
• C. The insurer waives the entire $1,800 premium for the year
• D. The $300 buys additional paid-up coverage and the full $1,800 remains payable

Correct answer: A. The insurer applies the $300 against the premium due, and Beth pays the remaining $1,500 out of pocket

Explanation: Under the premium reduction (reduce premium) option, the dividend is credited directly against the next premium due, so Beth's out-of-pocket cost drops to $1,800 - $300 = $1,500. Receiving a separate check describes the cash option, and buying more coverage describes paid-up additions. A dividend rarely covers the whole premium, so a full waiver is not what the option promises.

• A. $100,000, because accumulated dividends revert to the insurer at death
• B. $118,000 - the face amount plus the accumulated dividends and interest
• C. $100,000, with the $18,000 payable only to Vera's estate creditors
• D. $82,000, because accumulations are subtracted from the face amount

Correct answer: B. $118,000 - the face amount plus the accumulated dividends and interest

Explanation: Dividends accumulated at interest are the policyowner's money held on deposit with the insurer: they can be withdrawn at any time, and at the insured's death they are paid in addition to the face amount - here $100,000 + $18,000 = $118,000. The accumulation is never forfeited to the insurer or netted against the death benefit; unlike a policy loan, it is an asset, not a debt.

• A. Because the insurer must ignore health only if the policy is more than ten years old
• B. Because paid-up additions are purchased from a guaranteed side fund rather than as insurance
• C. Because each dividend buys a small block of paid-up permanent insurance at his attained age with no evidence of insurability required
• D. Because the option converts the policy to one-year term coverage, which is never underwritten

Correct answer: C. Because each dividend buys a small block of paid-up permanent insurance at his attained age with no evidence of insurability required

Explanation: Under the paid-up additions option, each dividend is applied as a single premium buying a small, fully paid block of permanent insurance that raises both the death benefit and the cash value - and no medical underwriting is required, so declining health cannot stop the growth. The additions are real insurance priced at attained age, not a side fund, and no ten-year rule exists.

• A. Accumulate at interest
• B. Premium reduction
• C. Paid-up additions
• D. The one-year term (fifth dividend) option

Correct answer: D. The one-year term (fifth dividend) option

Explanation: Because one-year term insurance is pure protection with no cash value, a dividend used as its single premium buys far more temporary death benefit than the same dollars would buy as paid-up permanent additions - though the extra coverage lapses at the end of each year. Paid-up additions buy a smaller but permanent increase, while accumulation and premium reduction add no death protection at all.

• A. Yes - policy dividends are taxed as ordinary income in the year received
• B. No - the dividends are a return of premium and are not taxable because they do not exceed the premiums he has paid
• C. Yes, but only at capital gains rates
• D. No, but he must repay the dividends if he ever surrenders the policy

Correct answer: B. No - the dividends are a return of premium and are not taxable because they do not exceed the premiums he has paid

Explanation: IRS Publication 550 treats dividends on insurance policies as a partial return of the premiums paid, nontaxable so long as cumulative dividends do not exceed total premiums. Frank's $4,000 is far below his $60,000 premium outlay, so nothing is reportable. Dividends are never repayable at surrender; they simply reduce his cost basis in the policy.