Comprehensive and Detailed in Depth Explanation:
The correct answer isC. The contract is annuitized. A deferred annuity has an accumulation period first, during which contributions are made and the annuity value builds. Benefit payments begin when the annuity enters the payout phase. The Maryland Insurance Administration explains thatannuitizationis the process of converting an annuity into a series of periodic payments, and that deferred annuities begin the payout phase sometime after purchase according to the contract.
Surrendering the contract is not the normal event that begins annuity benefit payments; it usually means terminating the contract for its surrender value and may involve charges. A cash refund is a settlement feature, not the event that starts regular benefits. The beneficiary's death does not initiate normal annuity payments to the annuitant. Official Maryland Reference: Maryland Insurance Administration, Annuities 101, annuitization and deferred annuity payout phase.

The entire contract provision (Insurance Article, § 15-207) defines the policy and application as the full agreement, barring producers from altering or waiving terms. Only the insurer has such authority.
References:Maryland Insurance Article, § 15-207; MIA policy standards.

How policy loans work in life insurance.
A policy loan is taken against the policy's cash value, not from the insurer's general funds.
Under both federal tax rules and Maryland insurance principles, policy loans are not taxable income as long as the policy remains in force.
Evaluate each option.
A). Taxable income
Incorrect. Policy loans are generally not taxable unless the policy lapses.
B). Loss of tax-exempt death benefit
Incorrect. Death benefits remain income-tax free, though the loan balance is deducted.
C). Becomes a modified endowment contract (MEC)
Incorrect. A loan does not convert a policy into a MEC.
D). Reduces amount receivable upon surrender
Correct. Any outstanding loan plus interest is deducted from the cash surrender value.
Maryland relevance.
Maryland regulates policy disclosures to ensure consumers understand that loans reduce cash value and net proceeds, which aligns with fair-dealing standards.
Conclusion.
The correct effect of a policy loan is a reduction in the amount receivable upon surrender.