17 Free Alabama Life & Health Practice Questions: Annuities, Retirement Plans, Business and Group Life, Social Security (2026)
How to Use This Set
This set covers the rest of Part II of the Alabama Life & Health outline: annuities and retirement plans, business and group life insurance, and Social Security. Together with the policy topics, Part II is 55 of 150 questions on the combined exam and 80 of 125 on the Life-only exam.
These topics reward knowing who pays, who owns and who is taxed. The 17 questions come from LanePrep's Alabama L&H quiz bank. Notice how many of them are about taxation and eligibility for a named plan, because that is how the exam tends to test this area.
Practice Questions 1-6: Annuities, IRAs and Needs Analysis
Choosing an income product for a lump sum, the tax-deductible retirement option for someone without an employer plan, funding a cross-purchase buy-sell agreement, calculating how much life insurance is needed, the refund payout options and Roth distributions.
Question 1 (Chapter 5)
An Alabama retiree recently sold her home and has a $200,000 lump sum. She wants to start receiving guaranteed monthly income payments immediately to cover her living expenses. Which of the following products would best meet her needs?
- A) Single Premium Deferred Annuity (SPDA)
- B) Flexible Premium Deferred Annuity (FPDA)
- C) Level Premium Immediate Annuity (LPIA)
- D) Single Premium Immediate Annuity (SPIA)
Show answer & explanation
Answer: D
A Single Premium Immediate Annuity (SPIA) is purchased with one lump sum and begins paying out income within one year (usually within 30 days). Deferred annuities delay payments until a later date.
Question 2 (Chapter 5)
A 40-year-old worker in Huntsville wants to save for retirement with a plan that offers tax-deductible contributions and tax-deferred growth. He is not covered by an employer-sponsored plan. Which of the following is most appropriate?
- A) Roth IRA
- B) Traditional IRA
- C) Non-qualified Deferred Compensation
- D) Key Person Life Insurance
Show answer & explanation
Answer: B
Traditional IRAs allow for tax-deductible contributions (depending on income and employer plan status) and tax-deferred growth. Roth IRAs use after-tax dollars (no deduction).
Question 3 (Chapter 5)
Two partners in an Alabama law firm enter into a 'Cross-Purchase' Buy-Sell agreement. If there are two partners, how many total life insurance policies must be purchased to fully fund this agreement?
- A) Two
- B) One
- C) Three
- D) Four
Show answer & explanation
Answer: A
In a cross-purchase plan, each partner buys a policy on every other partner. With two partners (A and B), A buys a policy on B, and B buys a policy on A, totaling two policies.
Question 4 (Chapter 5)
A producer is helping a client in Gadsden determine how much life insurance is needed. They calculate the client's future earnings, years until retirement, and the effects of inflation. This approach is known as the:
- A) Human Life Value Approach
- B) Needs Approach
- C) Capital Conservation Approach
- D) Estate Liquidity Approach
Show answer & explanation
Answer: A
The Human Life Value approach focuses on the financial value of the individual's earning capacity. The Needs Approach (Option B) focuses on specific expenses like mortgages and college tuition.
Question 5 (Chapter 5)
An Alabama resident is considering a 'Refund Life' annuity payout option. What is the main difference between a 'Cash Refund' and an 'Installment Refund'?
- A) Cash refund is paid to the annuitant; installment is paid to the beneficiary.
- B) Installment refund is only available for variable annuities.
- C) There is no difference; they are synonymous.
- D) Cash refund pays the remaining balance in a lump sum; installment refund continues the monthly payments until the balance is gone.
Show answer & explanation
Answer: D
Both options ensure the full principal is paid out. The 'Cash' version pays the beneficiary the remainder in one check, while the 'Installment' version keeps the original monthly check coming until the account is empty.
Question 6 (Chapter 5)
An employee at a tech firm in Montgomery has been contributing to a Roth IRA for 10 years. At age 62, she decides to take a total distribution of the account to travel. How will this distribution be treated for federal income tax purposes?
- A) The entire distribution is tax-free.
- B) The principal is tax-free, but the earnings are taxed as ordinary income.
- C) The entire distribution is taxable as ordinary income.
- D) The distribution is subject to a 10% early withdrawal penalty.
Show answer & explanation
Answer: A
Qualified distributions from a Roth IRA are tax-free if the account has been open for at least 5 years and the owner is at least 59 1/2 years old. Since she is 62 and has held the account for 10 years, the entire amount is tax-free.
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Practice Questions 7-12: Key Person, Social Security, Dividends, Group Conversion and Small-Business Plans
Who owns and benefits from key person coverage, what it takes to be currently insured under Social Security, how dividends are taxed, the conversion privilege on group life, and retirement plans for small employers and public employees.
Question 7 (Chapter 5)
A manufacturing company in Decatur purchases a 'Key Person' life insurance policy on its CEO. The company pays the premiums and is the policyowner. Who is the beneficiary of the policy?
- A) The manufacturing company
- B) The CEO's spouse
- C) The CEO's children
- D) The Alabama Department of Labor
Show answer & explanation
Answer: A
In a Key Person insurance arrangement, the business is the applicant, owner, premium payer, and beneficiary. The purpose is to compensate the business for the financial loss of a vital employee.
Question 8 (Chapter 5)
A young father in Selma dies after working for only 2 years. To provide survivor benefits for his children, he must have been 'Currently Insured.' This status requires earning at least how many credits during the 13-quarter period ending with death?
- A) 6 credits
- B) 10 credits
- C) 20 credits
- D) 40 credits
Show answer & explanation
Answer: A
A worker is 'Currently Insured' under Social Security if they have earned at least 6 credits during the 13-quarter period ending with the quarter of death, disability, or entitlement to retirement benefits.
Question 9 (Chapter 5)
A policyowner in Madison receives a $500 'dividend' from their participating whole life policy. How is this dividend treated for tax purposes?
- A) It is taxed as a capital gain.
- B) It is taxed as ordinary income.
- C) It is generally not taxable, as it is considered a return of overpaid premium.
- D) It is only taxable if it exceeds 10% of the policy's face value.
Show answer & explanation
Answer: C
Dividends paid by mutual insurers on participating policies are considered a return of unearned (overpaid) premium and are therefore not taxable. However, if the dividends are left with the insurer to earn interest, the *interest* earned is taxable.
Question 10 (Chapter 5)
An employee in Montgomery is covered under a group life insurance plan but is leaving the company to start her own business. She wants to convert her group coverage to an individual policy. Which of the following is TRUE regarding this conversion?
- A) She must provide evidence of insurability to the insurer.
- B) The premium for the new policy will be based on her attained age.
- C) She can convert the coverage to a term life policy.
- D) She has 60 days from the date of termination to apply for conversion.
Show answer & explanation
Answer: B
Under standard group life provisions, conversion must be to a permanent (whole life) policy, not term. No evidence of insurability is required. The premium is based on the individual's attained age at the time of conversion, and the standard conversion period is 31 days, not 60.
Question 11 (Chapter 5)
A local retail shop in Selma has 40 employees and wants to offer a retirement plan where the employer matches employee salary reductions. Which plan is specifically designed for businesses with 100 or fewer employees?
- A) 403(b) Plan
- B) Section 457 Plan
- C) SIMPLE IRA
- D) Profit-Sharing Plan
Show answer & explanation
Answer: C
The SIMPLE IRA (Savings Incentive Match Plan for Employees) is specifically for small businesses with 100 or fewer employees who do not maintain another retirement plan.
Question 12 (Chapter 5)
A janitor at a public university in Jacksonville, Alabama, is eligible for a retirement plan where contributions are made via salary reduction. This plan is most likely a:
- A) 401(k)
- B) 403(b)
- C) Keogh Plan
- D) HR-10 Plan
Show answer & explanation
Answer: B
A 403(b) plan, also known as a Tax-Sheltered Annuity (TSA), is specifically for employees of public schools, universities, and certain 501(c)(3) non-profit organizations.
Practice Questions 13-17: Retirement Plan Choice, Group Conversion and Dividend Tax
More plan-selection scenarios for small employers, the rules for taking Roth distributions, and a second and third pass at group conversion and the taxation of dividends left to accumulate.
Question 13 (Chapter 5)
A 65-year-old resident of Jasper has been contributing to a Roth IRA for 3 years. He wants to take a distribution to buy a boat. Which of the following is TRUE?
- A) The distribution is entirely tax-free because he is over 59 1/2.
- B) The earnings portion is taxable because the account has not been open for 5 years.
- C) He must pay a 10% early withdrawal penalty.
- D) Roth IRA distributions are always taxable as ordinary income.
Show answer & explanation
Answer: B
To be a 'qualified' (tax-free) distribution, a Roth IRA must satisfy two requirements: the owner must be at least 59 1/2 (or meet other criteria) AND the account must have been open for at least 5 years. Since it has only been 3 years, the earnings portion of the distribution is taxable.
Question 14 (Chapter 5)
The owner of a small landscaping business in Auburn wants to set up a retirement plan that allows for the highest possible employer contributions for her three employees but wants to avoid the complexity of a 401(k). Which plan should she consider?
- A) Section 403(b) Plan
- B) Roth IRA
- C) SEP IRA (Simplified Employee Pension)
- D) Deferred Compensation Plan
Show answer & explanation
Answer: C
A SEP IRA is designed for small businesses and self-employed individuals. It allows the employer to contribute a significantly higher amount than a traditional IRA and is much simpler to administer than a 401(k).
Question 15 (Chapter 5)
An employee in Tuscaloosa is covered under a $100,000 group term life insurance policy. Upon leaving the company, he exercises his conversion privilege to obtain an individual permanent policy. Which of the following is TRUE regarding the new policy's premium?
- A) The premium will be the same as the group rate.
- B) The premium will be based on the employee's original age when he joined the group.
- C) The premium will be based on the employee's attained age at the time of conversion.
- D) The premium is waived for the first year of the new policy.
Show answer & explanation
Answer: C
When converting from group to individual coverage, the insurer does not require evidence of insurability, but the premium for the new permanent policy is based on the insured's attained (current) age.
Question 16 (Chapter 5)
A local hardware store in Prattville has 15 employees and wants to establish a retirement plan where employees can contribute via salary reduction and the employer provides a matching contribution. Which plan is specifically designed for this size of business?
- A) SIMPLE IRA
- B) 403(b) TSA
- C) Defined Benefit Plan
- D) ESOP
Show answer & explanation
Answer: A
The SIMPLE IRA (Savings Incentive Match Plan for Employees) is designed for small businesses with 100 or fewer employees who do not maintain another retirement plan.
Question 17 (Chapter 5)
A policyowner in Madison has a participating whole life policy and chooses to leave her dividends with the insurer to accumulate at interest. Which of the following is TRUE regarding the taxation of these dividends?
- A) The dividends are taxable, but the interest is tax-free.
- B) Both the dividends and the interest are fully taxable.
- C) The dividends are tax-free, but the interest earned on them is taxable.
- D) Both the dividends and the interest are tax-free until surrendered.
Show answer & explanation
Answer: C
Dividends are considered a return of overpaid premium and are generally tax-free. However, any interest earned on dividends left with the company is taxable as ordinary income in the year it is credited.
The Mistakes That Cost Marks
Patterns from the questions above that cost candidates marks on exam day:
- Counting the policies wrong in a buy-sell. In a cross-purchase agreement, each owner buys a policy on each of the others.
- Mixing up who owns key person coverage. The business pays, owns and is the beneficiary.
- Assuming dividends are taxable income. A dividend is generally a return of premium. Interest earned on dividends left to accumulate is treated differently.
- Missing the group conversion limits. Read what the conversion privilege requires and what it does not, such as evidence of insurability.
- Choosing the wrong plan for the employer. The exam names an employer size or type and expects the matching plan.
Your Next Step
If these questions exposed a gap, listen to the matching lesson in the Alabama Life & Health course preview, then come back and rework the questions you missed. For more topics, see all of our free Alabama Life & Health practice questions.
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