Sample practice questions

A few real questions from this free bank, with full explanations. Use the practice tool above for the whole set.

1. 1. General Insurance Concepts

   For a life insurance policy to be valid, when must the policyowner have an insurable interest in the insured?

   • a.At the time of the insured's death
   • b.At the time the policy is applied for and issued
   • c.Continuously for the entire life of the policy
   • d.Only if the beneficiary is not a family member

   Answer: b

   Explanation: In life insurance, insurable interest must exist at the inception of the contract (when the policy is applied for), not at the time of loss. This differs from property insurance, where insurable interest must exist at the time of the loss. Requiring it continuously is incorrect: for example, a business may keep key-person coverage even after buying the policy, and a divorced spouse's policy can remain valid. Making it depend on the beneficiary's relationship confuses insurable interest (a relationship between owner and insured) with the separate question of who receives the proceeds.

2. 2. Life Insurance Basics

   Which statement best describes term life insurance?

   • a.It provides lifetime protection and builds guaranteed cash value
   • b.It provides death benefit protection for a specified period and normally builds no cash value
   • c.It allows the policyowner to skip premiums using the policy's savings element
   • d.It pays a benefit only if the insured survives the term

   Answer: b

   Explanation: Term insurance provides pure death benefit protection for a stated period (for example, 10 or 20 years) and, because there is no savings element, it generally builds no cash value, which makes it the lowest-cost way to buy a large death benefit. The first option describes permanent (whole) life. The third option describes a feature of cash-value policies, which term does not have. The fourth option is backwards: term pays if the insured dies during the term, not if the insured survives it.

3. 3. Life Insurance Policies

   A policyowner buys a term policy in which the death benefit steadily declines over the years while the premium stays level. This is commonly used to cover a mortgage. What is it called?

   • a.Increasing term
   • b.Decreasing term
   • c.Level term
   • d.Return-of-premium term

   Answer: b

   Explanation: Decreasing term has a death benefit that reduces over the policy period while the premium remains level, making it a natural fit for a declining debt such as a mortgage. Increasing term does the opposite, with a benefit that grows over time. Level term keeps both the face amount and premium constant. Return-of-premium term is level term that refunds premiums if the insured survives the term; it does not have a declining benefit.

4. 4. Life Policy Provisions, Riders, Options & Exclusions

   The incontestability provision in a life insurance policy provides that after the policy has been in force for a stated period (typically two years), the insurer:

   • a.May cancel the policy for any reason
   • b.Cannot void the policy or deny a claim due to a misstatement on the application, except in cases of fraud where allowed by law
   • c.Must double the death benefit
   • d.May raise the premium based on the insured's health

   Answer: b

   Explanation: The incontestability clause bars the insurer from contesting the policy (voiding it or denying a claim) based on misstatements in the application once it has been in force for the contestable period, usually two years, giving beneficiaries certainty. It does not let the insurer cancel at will, nor does it increase the death benefit or permit premium increases based on health. Its purpose is to protect the insured/beneficiary from having a long-standing policy challenged over an old application error.

5. 5. Annuities

   During the accumulation phase of a deferred annuity, what is happening?

   • a.The insurer is making periodic income payments to the annuitant
   • b.The owner is paying money into the contract and it is growing tax-deferred
   • c.The contract is being surrendered for its cash value
   • d.The death benefit is being paid to the beneficiary

   Answer: b

   Explanation: The accumulation (pay-in) phase is when the owner contributes premiums and the annuity's value grows on a tax-deferred basis, before income payments begin. Making periodic income payments describes the annuitization (payout or distribution) phase, not accumulation. Surrendering the contract ends it early. Paying a death benefit occurs if the owner/annuitant dies, which is a separate event. An immediate annuity skips accumulation, but a deferred annuity has this pay-in period first.

6. 6. Life & Annuity Taxation and Uses

   In a nonqualified deferred annuity, how are withdrawals taxed during the accumulation phase under the standard tax rule?

   • a.All withdrawals are entirely tax-free because the money was already taxed
   • b.The principal (cost basis) comes out first and is taxable
   • c.Earnings (interest) are considered withdrawn first and are taxable as ordinary income (LIFO)
   • d.Withdrawals are taxed as long-term capital gains

   Answer: c

   Explanation: For nonqualified annuities purchased after August 13, 1982, withdrawals follow last-in, first-out (LIFO) tax treatment: the taxable earnings (interest) are treated as coming out first and are taxed as ordinary income, and a 10% penalty may apply before age 59 1/2. The already-taxed principal (cost basis) comes out only after the earnings are exhausted, so the second option reverses the order. Annuity gains are ordinary income, not tax-free and not capital gains, which rules out the first and fourth options. During annuitization, the exclusion ratio instead spreads the return of basis across each payment.

7. 7. Health Policies

   A disability income policy uses an 'own-occupation' definition of total disability. This means the insured is considered totally disabled if, because of injury or sickness, they cannot:

   • a.Perform the duties of any occupation for which they are reasonably suited
   • b.Leave their home for any reason
   • c.Perform the material duties of their own regular occupation
   • d.Work in any job anywhere in the country

   Answer: c

   Explanation: An own-occupation definition treats the insured as totally disabled when they cannot perform the important duties of their own regular occupation, even if they could work in some other job; it is the more generous (and thus more expensive) definition, favoring the insured. The 'any-occupation' definition, which is stricter, requires that the insured be unable to work in any job for which they are reasonably suited by education, training, or experience, and that is what the first and fourth options describe. Being unable to leave home is not part of either standard definition.

8. 8. Health Policy Provisions, Clauses & Riders

   Under the Uniform Provisions Law, the 'time limit on certain defenses' (incontestability) provision in an individual health policy generally prevents the insurer, after the policy has been in force for a stated period, from:

   • a.Ever raising premiums on the class of policyholders
   • b.Requiring proof of loss for a claim
   • c.Denying a claim based on misstatements in the application (except fraudulent ones, where permitted)
   • d.Paying benefits on time

   Answer: c

   Explanation: The time-limit-on-certain-defenses (incontestability) provision bars the insurer, after the policy has been in force for a set period (often two or three years), from voiding the policy or denying a claim because of misstatements made in the application, with an exception for fraudulent misstatements where state law allows. It does not restrict the insurer's right to adjust premiums for a whole class, nor does it eliminate the routine requirement that the insured submit proof of loss. Paying benefits on time is required by a separate provision (time of payment of claims), not this one.

9. 9. State Producer Licensing

   Before taking the California life and health agent exam, an applicant for a combined life and accident-and-health license must complete prelicensing education that includes how many hours devoted specifically to ethics and the California Insurance Code?

   • a.0 hours
   • b.4 hours
   • c.12 hours
   • d.40 hours

   Answer: c

   Explanation: California requires a 12-hour course on ethics and the California Insurance Code (including one hour on insurance fraud) as prelicensing education for life and accident-and-health applicants. Effective January 1, 2026, the former 20-hour-per-line prelicensing courses were repealed, leaving the 12-hour ethics and Code course as the distinctive California prelicensing requirement.

10. 10. State Insurance Law & Code

    The California Life and Health Insurance Guarantee Association differs from those in many states in that its coverage of an insolvent insurer's contractual obligations is limited to:

    • a.100% of obligations with no cap
    • b.80% of covered obligations, up to statutory maximums
    • c.A flat 50% of all obligations
    • d.Annuity contracts only

    Answer: b

    Explanation: California's Guarantee Association generally covers 80% of an insolvent insurer's covered contractual obligations, subject to statutory dollar caps (for example, on death benefits). This 80% level is a distinctive California feature; many states cover a higher percentage.