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Which of the following statements about cash values in whole life insurance policies is true?
Answer : A
Cash values in whole life insurance are a key feature, and they:
Accumulate as a result of the level premium concept (A), where excess premiums in the early years of the policy build the cash value.
Are guaranteed in whole life policies, contrary to option B.
Do not equal the face value at age 65 (C) unless specifically structured for that purpose.
Continue to grow beyond age 65 as long as the policy remains active, invalidating option D.
Which of the following statements about participating life insurance is true?
Answer : A
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).
Which amount may be deposited into a rollover individual retirement account (IRA) for the purpose of deferring income taxes?
Answer : C
A rollover IRA is used to defer taxes on qualifying distributions.
Proceeds from a life insurance policy (A) are generally not eligible for tax-deferred treatment.
Refunds from a refund life annuity (B) are considered taxable income and not eligible for rollover.
Amounts paid to a spouse under a tax-sheltered annuity (C) qualify for rollover treatment because they meet IRS rollover rules for deferred taxation.
IRAs inherited from parents (D) follow different tax rules and cannot be directly rolled over into a new IRA.
All of the following normally indicate the presence of insurable interest in the life of another person EXCEPT:
Answer : A
Definition of insurable interest in life insurance (Maryland context).
Under Maryland insurance principles, an insurable interest in the life of another exists when the policy owner would suffer a financial loss or certain types of recognized personal loss upon the insured's death.
Maryland Insurance law requires that insurable interest must exist at the time the life insurance policy is issued.
Evaluate each option.
A . Maintaining a lasting friendship
Friendship alone does not create a recognized financial or legal loss upon death.
Maryland law does not recognize friendship, by itself, as sufficient insurable interest.
B . Being closely related by birth
Close blood relationships (such as parent-child or siblings) are presumed to have insurable interest under Maryland standards.
C . Being married
Spouses automatically have insurable interest due to shared financial obligations and dependency.
D . Co-signing a mortgage
This creates a direct financial interest, since one party would suffer a monetary loss if the other dies.
Conclusion.
Only friendship, without financial dependency or legal obligation, fails to establish insurable interest.
An individual purchased a flexible premium deferred annuity. When must the interest income be reported for federal income tax purposes?
Answer : C
Tax treatment of deferred annuities.
A deferred annuity accumulates interest on a tax-deferred basis.
Interest earnings are not reported annually while they remain in the contract.
Trigger for taxation.
Federal tax law, followed by Maryland for income reporting, requires taxation only when distributions are received.
Interest is taxed as ordinary income, not capital gains.
Evaluate each option.
A . Annually
Incorrect. This would describe taxable interest accounts, not annuities.
B . After recovering principal
Incorrect. Under the LIFO rules for annuities, interest is taxed first.
C . Upon receiving distributions or income benefits
Correct. This is when taxation occurs.
D . Tax-exempt
Incorrect. Annuities are tax-deferred, not tax-exempt.
Conclusion.
Interest income is reported when distributions are received.
