17 Free Texas Life Agent Practice Questions: Annuities (2026)
How to Use This Annuities Set
Annuities appear in the general knowledge part of the Texas Life Agent exam, which has 50 scored questions across four sections: types of policies (15), riders, provisions, options and exclusions (15), application and underwriting (12), and retirement and other insurance concepts (8). This guide does not claim an exact number of annuity questions on your form.
An annuity is described by independent choices: how it is funded, when payments start, how the value grows, and how it pays out. These 17 questions also cover the tax treatment of gains, surrender charges and the suitability duty. Separate the choices first and most questions become a single decision.
Practice Questions 1-6: Funding, Payout and Surrender
Naming the contract from the client, choosing a payout option, applying a surrender-charge schedule and recognising a tax-free exchange between contracts.
Question 1 (Chapter 3)
John, 45, wants to start saving for retirement but prefers to make regular, smaller contributions over many years rather than a single large deposit. He is looking for an annuity that allows him to contribute monthly until he retires at age 65. Which funding method is most suitable for John's needs?
- A) Single Premium Immediate Annuity (SPIA).
- B) Flexible Premium Deferred Annuity.
- C) Single Premium Deferred Annuity.
- D) Immediate Variable Annuity.
Show answer & explanation
Answer: B
John's desire to make regular, smaller contributions over many years points to a Flexible Premium annuity. Since he plans to contribute until retirement at age 65, the payouts will be deferred until a later date, making it a Deferred Annuity. Therefore, a Flexible Premium Deferred Annuity is the most suitable option. A Single Premium annuity involves one lump sum, and an Immediate Annuity starts payouts within one year, neither of which fits John's scenario.
Question 2 (Chapter 3)
Mr. and Mrs. Rodriguez want to ensure that if one of them passes away, the surviving spouse will continue to receive annuity payments for the rest of their life, albeit at a reduced amount. They are looking for an annuitization option that covers two lives. Which payout option should they choose?
- A) Life Only.
- B) Life with Period Certain.
- C) Life with Refund.
- D) Joint and Survivor.
Show answer & explanation
Answer: D
The Joint and Survivor annuity payout option is specifically designed for two or more annuitants, typically spouses. It provides payments for the lives of both individuals, and upon the death of the first annuitant, payments continue to the survivor, often at a reduced percentage (e.g., 100%, 75%, or 50%). Life Only ends payments upon the death of the annuitant, and Life with Period Certain or Refund options focus on guarantees for a single annuitant or their beneficiaries for a limited period, not for a second living annuitant's lifetime.
Question 3 (Chapter 3)
Under the Texas Department of Insurance (TDI) Suitability in Annuity Transactions Rule, what is the primary responsibility of a licensee when recommending an annuity to a consumer?
- A) To make a recommendation that is based on the consumer's needs, objectives, and financial situation.
- B) To recommend the annuity with the highest commission for the licensee.
- C) To ensure the consumer's assets are fully invested in annuities.
- D) To guarantee a specific return on investment for the consumer.
Show answer & explanation
Answer: A
The TDI Suitability in Annuity Transactions Rule mandates that licensees must make recommendations that are suitable for the consumer, meaning they must be based on a careful consideration of the consumer's needs, objectives, and financial situation. Recommending based on commission or ensuring full investment are unethical and not compliant. Guaranteeing a specific return is generally not possible or permissible, especially with variable products, and goes against the principle of suitability.
Question 4 (Chapter 3)
Mr. Singh, age 65, annuitizes a $200,000 non-qualified deferred annuity under a Life Only option. He receives his first monthly payment in January. Six weeks later, he dies unexpectedly. What is paid to his named beneficiary?
- A) Nothing. Payments cease at the annuitant's death under Life Only.
- B) The full remaining account value of $200,000 minus payments already received.
- C) A refund of the original purchase price minus payments received.
- D) Ten years of guaranteed payments to the beneficiary.
Show answer & explanation
Answer: A
Life Only (also called Straight Life) pays the highest periodic income because the insurer's obligation ends at the annuitant's death. There is no refund, no period certain, and no beneficiary payment, even if death occurs shortly after annuitization. This forfeiture risk is precisely why the payment is highest. A refund feature would be Life with Refund; a guaranteed payment period would be Life with Period Certain.
Question 5 (Chapter 3)
Robert, age 60, surrenders his 4-year-old deferred annuity worth $100,000. The contract's surrender charge schedule starts at 7% in year 1 and declines by 1% each year. The contract allows a 10% annual free withdrawal. What surrender charge applies if he withdraws the entire account value?
- A) A 7% charge on the full $100,000.
- B) A 3% charge on $100,000 with no free withdrawal allowed on surrender.
- C) A 4% charge on $90,000 (the amount above the 10% free corridor).
- D) No charge, because surrender charges only apply in years 1-3.
Show answer & explanation
Answer: C
Surrender-charge schedules typically decline each year. Starting at 7% in year 1 and dropping 1% annually, year 4 is 7% - 3% = 4%. The free withdrawal corridor (10% of account value, here $10,000) is exempt from surrender charges, leaving $90,000 subject to the 4% charge. Surrender charges compensate the insurer for early termination during the period the insurer is amortizing acquisition costs.
Question 6 (Chapter 3)
Maria transfers $150,000 from one non-qualified deferred annuity to a different non-qualified deferred annuity from another insurer using a direct transfer. What IRS Code section permits this without triggering current taxation?
- A) IRC § 401(k).
- B) IRC § 72(q).
- C) IRC § 1035.
- D) IRC § 7702A.
Show answer & explanation
Answer: C
IRC § 1035 permits tax-free exchanges between like-kind insurance contracts: annuity-to-annuity, life-to-annuity, life-to-life, and life-to-long-term-care. The transfer must be direct (insurer-to-insurer) and the contract owner must remain the same. § 401(k) governs qualified retirement plans, § 72(q) imposes the 10% premature distribution penalty, and § 7702A defines Modified Endowment Contracts (life insurance, not annuities). Note: annuity-to-life is NOT a permitted 1035 exchange direction.
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Practice Questions 7-12: Annuitization, Taxation and Exchanges
What annuitization does, how gains are taxed, the exclusion ratio, surrender-charge exposure, the direction of a tax-free exchange and what happens when a client will not give suitability information.
Question 7 (Chapter 3)
An annuitant is about to start receiving payments. Once the annuity is annuitized:
- A) The annuitant can switch payout options at any time.
- B) Surrender charges automatically reset to zero.
- C) The decision is generally irrevocable and the payout stream begins.
- D) The contract returns to the accumulation phase.
Show answer & explanation
Answer: C
Annuitization is generally irrevocable. Once the contract converts the accumulated value into a payment stream under a selected payout option, the option cannot be changed and the lump sum cannot be recovered. This irreversibility is a critical suitability consideration and a frequent exam point. It is one of the primary risks to disclose to a client choosing annuitization over systematic withdrawals.
Question 8 (Chapter 3)
Phil, age 50, surrenders his non-qualified deferred annuity for $80,000. His original investment was $60,000. What is the federal tax consequence?
- A) $20,000 taxed as ordinary income plus a 10% IRS premature distribution penalty on that $20,000.
- B) $80,000 taxed as ordinary income with no penalty.
- C) $20,000 taxed as long-term capital gains.
- D) Nothing taxable because the original $60,000 is returned tax-free.
Show answer & explanation
Answer: A
The $20,000 gain (excess of $80,000 over $60,000 basis) is taxable as ordinary income — annuity gains are NEVER capital gains, regardless of underlying investments. Because Phil is under age 59 1/2, IRC § 72(q) imposes a 10% premature distribution penalty on the taxable portion only ($2,000 penalty). His $60,000 of basis is returned tax-free. Withdrawals from non-qualified annuities follow LIFO, so the gain is treated as coming out first if withdrawn in pieces.
Question 9 (Chapter 3)
Annuitization payments from a non-qualified annuity consist partly of return of basis and partly of taxable gain. The fraction of each payment that is tax-free is determined by:
- A) The exclusion ratio.
- B) The LIFO ordering rule.
- C) The participation rate.
- D) The cap rate.
Show answer & explanation
Answer: A
The exclusion ratio (investment in contract divided by expected return) determines the tax-free portion of each annuitized payment. LIFO applies to lump-sum withdrawals from deferred annuities, not annuitized payments. Participation rate and cap rate are FIA crediting mechanisms, unrelated to taxation. Once basis is fully recovered, the exclusion ratio no longer applies and all subsequent payments are 100% taxable.
Question 10 (Chapter 3)
Diana, age 67, owns a fixed indexed annuity with a 10-year surrender schedule and is now 8 years into the contract. She wants to withdraw funds to pay for a kitchen remodel. Which factor is MOST relevant to assessing surrender penalty exposure?
- A) The S&P 500's year-to-date performance.
- B) Whether she has a beneficiary named.
- C) Her current surrender-charge percentage in year 8 and the free-withdrawal corridor amount.
- D) Whether the agent who sold the contract is still licensed.
Show answer & explanation
Answer: C
To evaluate surrender penalty exposure, Diana needs to know (1) what year of the surrender-charge schedule she is in and the corresponding percentage, and (2) how much she can withdraw under the free-withdrawal corridor without any charge. Index performance affects account value but not the surrender-charge calculation. Beneficiaries and the original agent's licensure status are irrelevant to surrender pricing.
Question 11 (Chapter 3)
Which of the following is NOT a permissible IRC § 1035 tax-free exchange?
- A) Life insurance policy to annuity.
- B) Annuity to annuity.
- C) Annuity to life insurance policy.
- D) Life insurance policy to life insurance policy.
Show answer & explanation
Answer: C
IRC § 1035 permits tax-free exchanges in only one direction between life and annuity: life-to-annuity is allowed, but annuity-to-life is NOT. Permissible exchanges include life-to-life, life-to-annuity, annuity-to-annuity, life-to-LTC, and annuity-to-LTC. The asymmetry reflects that gains in an annuity would otherwise be taxed as ordinary income; allowing exchange into life insurance (with its tax-free death benefit) would create a tax-avoidance opportunity Congress did not intend.
Question 12 (Chapter 3)
A client tells her agent she does not want to provide detailed financial information for the suitability analysis. Under the TDI Suitability Rule, the agent may:
- A) Proceed with the sale only after the consumer signs a statement that the consumer refuses to provide suitability information, and the recommendation must not be based on incomplete information that the agent has reason to believe is materially inaccurate.
- B) Recommend any annuity because the client waived the rule.
- C) Refuse to disclose any information about the product.
- D) Report the client to TDI for non-cooperation.
Show answer & explanation
Answer: A
The TDI rule contemplates that a consumer may refuse to provide suitability information. In that case, the consumer must sign a statement acknowledging the refusal, and the licensee may proceed only if no recommendation is made or if any recommendation is not based on materially inaccurate information. The refusal does not eliminate the licensee's overall fiduciary-style obligations. The agent does not refuse to disclose product information and does not report to TDI. A blanket 'waiver' of suitability is not permitted.
Practice Questions 13-17: Penalties, Death Benefits and Indexed Features
The early-withdrawal penalty and the amount it applies to, inheriting an annuity, the floor in an indexed contract and the annuitant's role.
Question 13 (Chapter 3)
An annuitant under age 59 1/2 takes a withdrawal of $10,000 from a non-qualified deferred annuity that includes $7,000 of gain. The 10% IRS premature distribution penalty under IRC § 72(q) applies to:
- A) $10,000 (the full withdrawal).
- B) $7,000 (only the taxable gain portion).
- C) $3,000 (the basis portion only).
- D) Nothing — the penalty applies only to qualified plans.
Show answer & explanation
Answer: B
IRC § 72(q) imposes a 10% penalty on the TAXABLE portion of a premature distribution from a non-qualified annuity. Under LIFO, the $7,000 gain comes out first and is taxable, so the penalty is 10% of $7,000 = $700. The remaining $3,000 of the withdrawal would be a return of basis (tax-free, no penalty). The penalty applies to non-qualified annuities — not only to qualified plans — though several exceptions exist (death, disability, substantially-equal periodic payments under § 72(q)(2)).
Question 14 (Chapter 3)
Marcia, age 80, has a 7-year-old non-qualified deferred annuity. The original premium was $100,000; the current account value is $145,000. She wants to leave a death benefit for her children. Which approach is MOST tax-efficient at her death?
- A) Continue to defer; her heirs will receive the contract and owe ordinary income tax on $45,000 of gain (no step-up in basis).
- B) Continue to defer; her heirs receive a step-up in basis on the full $145,000.
- C) Surrender the annuity now to lock in the gain at long-term capital gains rates.
- D) Convert to life insurance via a 1035 exchange to eliminate income tax at death.
Show answer & explanation
Answer: A
Annuities do NOT receive a step-up in basis at death — unlike most other inherited assets. Heirs inherit the contract along with the embedded ordinary-income tax liability on any gain ($45,000 here). Annuity-to-life 1035 exchanges are NOT permitted (annuity gains would escape ordinary income tax through tax-free death benefits, which Congress did not intend). Gains are always ordinary income, never capital gains. This makes annuities tax-INEFFICIENT for estate transfer compared to assets that step up.
Question 15 (Chapter 3)
Mr. Chen purchased a non-qualified deferred annuity and named his daughter as the beneficiary. After 10 years, during the accumulation phase, Mr. Chen passed away. The annuity had grown significantly, with a substantial gain over his original investment. What are the typical tax implications for his daughter, the beneficiary, regarding the death benefit from this non-qualified annuity?
- A) The original investment (basis) is received tax-free, but the accumulated gain is taxable as ordinary income to the daughter.
- B) The entire death benefit, including the original investment and the gain, is received tax-free by the daughter.
- C) The entire death benefit is subject to a 10% premature distribution penalty, in addition to being taxed as ordinary income.
- D) The death benefit is treated as a capital gain, subject to capital gains tax rates.
Show answer & explanation
Answer: A
For non-qualified annuities, upon the owner's death during the accumulation phase, the beneficiary receives the original investment (basis) tax-free. However, any accumulated earnings or gains are taxable as ordinary income to the beneficiary. The 10% premature distribution penalty typically applies to withdrawals made by the owner before age 59½, not usually to death benefits received by a beneficiary, although there are specific rules for spousal beneficiaries. It is not treated as a capital gain.
Question 16 (Chapter 3)
Ms. Davis is considering an Equity-Indexed Annuity (EIA) because she wants potential market-linked growth without the risk of losing her principal. She is particularly interested in a feature that ensures her account value will not fall below a certain percentage, even if the underlying index performs poorly. What is this protective feature called?
- A) A floor
- B) A cap rate
- C) A participation rate
- D) A spread
Show answer & explanation
Answer: A
A floor (or minimum guaranteed interest rate) in an Equity-Indexed Annuity protects the principal from market downturns. It ensures that even if the underlying index has negative performance, the interest credited will not fall below a specified minimum, often 0% or 1-3%. A cap rate limits upside potential, a participation rate determines how much of the index gain is credited, and a spread is a deduction from the index gain.
Question 17 (Chapter 3)
Mr. Davies purchases an annuity and names his younger sister, Susan, as the annuitant. Mr. Davies is the owner and beneficiary. What is the primary role of Susan, the annuitant, in this annuity contract?
- A) Susan controls the contract and can make withdrawals or change beneficiaries.
- B) Susan is the measuring life upon which the annuity payments are based.
- C) Susan receives the death benefit if Mr. Davies dies during the accumulation phase.
- D) Susan is responsible for making the premium payments into the annuity.
Show answer & explanation
Answer: B
The annuitant is the individual whose life expectancy determines the payout period and amount of the annuity payments. They are the 'measuring life.' The owner (Mr. Davies in this case) controls the contract, and the beneficiary (also Mr. Davies) receives the death benefit. The owner is responsible for premiums.
The Mistakes That Cost Marks
Treating annuity gains as capital gains. The gain is ordinary income. The questions use this repeatedly.
Applying the early-withdrawal penalty to the whole withdrawal. It applies to the taxable gain portion only, and gains come out first on lump-sum withdrawals.
Forgetting the direction of the exchange rule. Life to annuity is allowed; annuity to life is not.
Believing annuitization can be undone. It is generally irrevocable.
Confusing the parties. The annuitant is the measuring life; the owner controls the contract. Check which role the stem is asking about.
Your Next Step
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For the rest of the free questions, go to the full list of free Texas Life Agent practice questions. The exam is 90 questions in 120 minutes with a scaled passing score of 70, and 45-46% of first-time candidates passed in July to September 2026.
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