17 Free Tennessee Life & Health Practice Questions: Life Applications, Underwriting and Retirement Concepts (2026)
How to Use This Set
Section III of the Tennessee Life exam, completing the application, underwriting, and delivering the policies, carries 12 items, and Section IV, retirement and other insurance concepts, carries 8. Both sit inside the 50 scored general-knowledge questions.
This set follows a policy from application to delivery, then moves into taxation and retirement plans.
Practice Questions 1-6: Applications, Contract Law, Underwriting and MEC
An incomplete application, the contract of adhesion, the seven-pay test, risk classes and delivery when the premium is not collected. Think about what each party did and what the law infers from it.
Question 1 (Chapter 3)
A producer submits a life insurance application to a Tennessee insurer but forgets to fill out the 'Tobacco Use' section. The insurer issues the policy anyway without asking for the missing information. Two years later, the insured dies of lung cancer, and the insurer discovers the insured was a heavy smoker. Which of the following applies?
- A) The insurer can deny the claim because the application was incomplete.
- B) The insurer can reduce the death benefit to what the premium would have purchased for a smoker.
- C) The producer is personally liable for the death benefit due to negligence.
- D) The insurer must pay the claim because by issuing the policy, they waived the right to that information.
Show answer & explanation
Answer: D
If an insurer issues a policy based on an incomplete application, they are legally deemed to have waived their right to the missing information. They cannot later use the missing information as a basis for denying a claim.
Question 2 (Chapter 3)
An insurance contract is often referred to as a 'contract of adhesion.' What does this mean for a Tennessee policyholder if a policy provision is found to be ambiguous in court?
- A) The contract is voided and premiums are returned.
- B) The court will interpret the ambiguity in favor of the insurer because they wrote the contract.
- C) The producer is required to arbitrate the meaning of the clause.
- D) The court will interpret the ambiguity in favor of the insured because they had no say in the contract's wording.
Show answer & explanation
Answer: D
Because insurance contracts are 'adhesion' contracts (offered on a 'take it or leave it' basis without negotiation), courts rule that any ambiguity must be interpreted in favor of the party that did not draft the document—the insured.
Question 3 (Chapter 3)
A life insurance policy that fails the '7-pay test' is classified by the IRS as a Modified Endowment Contract (MEC). What is the primary tax consequence of a policy becoming a MEC?
- A) The death benefit becomes fully taxable as ordinary income.
- B) The insurer must refund all premiums to the policyholder immediately.
- C) The policy is automatically converted to a term insurance policy.
- D) Policy loans and withdrawals are taxed on a Last-In, First-Out (LIFO) basis and may be subject to a 10% penalty.
Show answer & explanation
Answer: D
Once a policy is classified as a MEC, it loses the favorable 'tax-free' withdrawal status of life insurance. Withdrawals are taxed as income first (LIFO), and if the owner is under age 59 1/2, a 10% federal tax penalty applies.
Question 4 (Chapter 3)
An applicant for a life insurance policy in Nashville has a history of chronic respiratory issues. The insurer decides to issue the policy but charges a higher premium than the standard rate to compensate for the increased risk. This risk classification is known as:
- A) Preferred
- B) Declined
- C) Non-rated
- D) Substandard
Show answer & explanation
Answer: D
Substandard risks (also called 'rated' policies) are those that do not meet the requirements for standard insurance due to health, habits, or occupation. The insurer covers the risk but charges a higher premium. Preferred risks (A) receive lower-than-standard rates.
Question 5 (Chapter 3)
A producer in Clarksville completes a life insurance application but does not collect the initial premium. When the producer delivers the policy three weeks later, what must they obtain from the applicant to make the coverage effective?
- A) The premium and a signed Statement of Good Health
- B) A new application
- C) A conditional receipt
- D) A waiver of premium rider
Show answer & explanation
Answer: A
If the premium is not paid at the time of application, coverage does not begin until the policy is delivered, the premium is paid, and the applicant signs a Statement of Good Health confirming their health has not changed since the application date.
Question 6 (Chapter 3)
A policyowner has a participating whole life policy and receives a $500 dividend. They choose to use the dividend to reduce their next premium payment. How is this dividend treated for federal income tax purposes?
- A) It is fully taxable as capital gains
- B) It is fully taxable as ordinary income
- C) It is only taxable if it exceeds the policy's cash value
- D) It is generally not taxable as it is considered a return of overpaid premium
Show answer & explanation
Answer: D
Dividends paid on participating life insurance policies are considered a return of excess premium and are generally not taxable. However, if dividends are left with the insurer to accumulate interest, the *interest* earned on those dividends is taxable.
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Practice Questions 7-12: Money Rules, Delivery, Receipts and Needs
Anti-money-laundering reporting, delivering a rated policy, taxation of installments, conditional receipts, Social Security child benefits and the needs approach.
Question 7 (Chapter 3)
A client in Nashville wants to purchase a single-premium whole life policy with a $50,000 cash payment. Under the USA PATRIOT Act and Anti-Money Laundering (AML) rules, the insurance company must:
- A) Report the transaction using a Suspicious Activity Report (SAR) if it appears to involve illegal funds
- B) Refuse the payment entirely
- C) Wait 30 days before issuing the policy
- D) Charge an extra 10% fee for cash handling
Show answer & explanation
Answer: A
The USA PATRIOT Act requires insurers to have AML programs. Large cash transactions or unusual payment patterns must be monitored, and if suspicious, a SAR must be filed with the Department of the Treasury.
Question 8 (Chapter 3)
A producer in Chattanooga delivers a life insurance policy to a client. The policy was issued with a 'rating' due to the client's high-risk hobby of skydiving. What is the producer's primary responsibility during this delivery?
- A) To explain the reason for the higher premium and ensure the client still wants the coverage.
- B) To tell the client that the rating is a mistake and will be fixed later.
- C) To collect the original lower premium and ask the company for a credit.
- D) To leave the policy in the mailbox to avoid an uncomfortable conversation about the rating.
Show answer & explanation
Answer: A
When a policy is issued as 'rated' (substandard), it means the premium is higher than originally quoted. The producer must explain the rating, the riders, or any exclusions to the client and obtain their acceptance of the policy at the higher rate.
Question 9 (Chapter 3)
A policyowner in Clarksville decides to take the death benefit of a life insurance policy in installments over 10 years rather than a lump sum. How is this taxed?
- A) The entire installment is tax-free.
- B) The entire installment is taxable as ordinary income.
- C) The principal portion is tax-free, but the interest earned is taxable.
- D) The installments are taxed as capital gains.
Show answer & explanation
Answer: C
While life insurance death benefits paid in a lump sum are generally tax-free, when paid in installments, the principal remains tax-free, but any interest paid by the insurer on the remaining balance is taxable as ordinary income.
Question 10 (Chapter 3)
An applicant in Murfreesboro applies for a life insurance policy and pays the initial premium. The producer provides a receipt stating that coverage is effective immediately, provided the applicant passes a medical exam and meets the insurer's standard underwriting requirements. This type of agreement is known as a:
- A) Binding Receipt
- B) Warranty Agreement
- C) Conditional Receipt
- D) Adhesion Contract
Show answer & explanation
Answer: C
A Conditional Receipt makes coverage effective as of the date of the application or medical exam, whichever is later, provided the applicant is found to be insurable at the rate applied for. A Binding Receipt (common in P&C but rare in Life) would provide immediate coverage regardless of underwriting.
Question 11 (Chapter 3)
A worker in Jackson dies, leaving behind a 10-year-old child. Under Social Security, the child is entitled to survivor benefits. At what age will these benefits typically terminate if the child is not disabled and remains in school?
- A) Age 16
- B) Age 21
- C) Age 18, or 19 if still in high school
- D) Age 26
Show answer & explanation
Answer: C
Social Security survivor benefits for children generally continue until age 18, or age 19 if the child is still a full-time student in elementary or secondary school.
Question 12 (Chapter 3)
A producer is conducting a 'Needs Approach' analysis for a family in Germantown. Which of the following would be categorized as an 'Immediate Cash Need' rather than an 'Ongoing Income Need'?
- A) Monthly grocery expenses
- B) Retirement income for the surviving spouse
- C) Estate taxes and funeral costs
- D) Inflation-adjusted salary replacement
Show answer & explanation
Answer: C
The Needs Approach looks at two categories: Cash Needs (lump sums needed at death, like final expenses, debt payoff, or an emergency fund) and Income Needs (ongoing money for the family to live on).
Practice Questions 13-17: Retirement Plans, Dividends, Juvenile Applications and Classification
Which plan fits which employee, how dividend interest is taxed, who signs on a juvenile policy, and what a preferred classification buys.
Question 13 (Chapter 3)
A public school teacher in Jackson is looking for a retirement plan that allows for pre-tax contributions and tax-deferred growth. Which of the following plans is specifically designed for employees of public schools and certain non-profit organizations?
- A) 401(k) Plan
- B) 403(b) Tax Sheltered Annuity (TSA)
- C) Keogh Plan (HR-10)
- D) SIMPLE IRA
Show answer & explanation
Answer: B
A 403(b) plan, also known as a Tax Sheltered Annuity (TSA), is a retirement plan specifically for employees of public schools, charities, and certain religious organizations. 401(k)s are typically for private-sector for-profit companies.
Question 14 (Chapter 3)
A policyowner in Murfreesboro has a Whole Life policy and chooses the 'Accumulate at Interest' dividend option. At the end of the year, the insurer sends a statement showing $100 in dividends and $5 in interest earned on those dividends. What are the tax consequences?
- A) The entire $105 is taxable as ordinary income.
- B) The $100 dividend is tax-free, but the $5 interest is taxable as ordinary income.
- C) The $100 dividend is taxable, but the $5 interest is tax-free.
- D) Neither the dividend nor the interest is taxable.
Show answer & explanation
Answer: B
Dividends paid on life insurance policies are generally considered a return of overpaid premium and are not taxable. However, any interest earned on those dividends while held by the insurer is considered taxable income in the year it is credited.
Question 15 (Chapter 3)
A mother in Murfreesboro is applying for a life insurance policy on her 12-year-old son, naming herself as the primary beneficiary. Which of the following parties must sign the application for it to be considered complete by a Tennessee insurer?
- A) The mother and the son
- B) The mother, the son, and the producer
- C) The mother, the producer, and the son's legal guardian
- D) The mother and the producer
Show answer & explanation
Answer: D
In Tennessee, for a juvenile policy where the insured is a minor, the applicant (mother) and the producer must sign. The minor's signature is generally not required until they reach the age of majority (usually 15 or 18 depending on the insurer's rules, but legally 18 in TN for full contract capacity). Since the mother is the applicant and payor, her signature is required along with the producer's.
Question 16 (Chapter 3)
An underwriter for a Tennessee life insurer reviews an application and finds that the applicant is a marathon runner with no health issues and a clean family history. The underwriter assigns a 'Preferred' risk classification. What is the primary effect of this classification on the policy?
- A) The policy will have higher death benefits for the same premium.
- B) The policy will have lower premiums than a standard risk.
- C) The policy's contestable period is waived.
- D) The policy will accumulate cash value at a faster guaranteed rate.
Show answer & explanation
Answer: B
A 'Preferred' risk classification is awarded to individuals who meet certain health and lifestyle criteria that suggest they will live longer than the average person. Consequently, insurers reward these applicants with lower premium rates than those charged for 'Standard' risks.
Question 17 (Chapter 3)
A self-employed consultant in Germantown contributes to a Simplified Employee Pension (SEP) IRA. Which of the following statements is TRUE regarding the tax treatment of this qualified retirement plan?
- A) Employer contributions are tax-deductible for the business.
- B) Contributions are made with after-tax dollars.
- C) Distributions are tax-free if the consultant is over age 59 1/2.
- D) The plan must be approved by the Tennessee Department of Revenue.
Show answer & explanation
Answer: A
A SEP IRA is a qualified retirement plan. In qualified plans, employer contributions are tax-deductible as a business expense, and earnings grow tax-deferred. Distributions are taxed as ordinary income.
The Mistakes That Cost Marks
Letting an incomplete application deny the claim. When an insurer issues a policy on an incomplete application without asking, the missing information cannot later be used to deny the claim.
Missing the MEC consequence. A policy that fails the seven-pay test becomes a modified endowment contract; loans and withdrawals are taxed last-in, first-out and a 10% penalty may apply under age 59 and a half.
Mixing up receipts. A conditional receipt makes coverage effective subject to insurability; if no premium was collected at application, the premium and a statement of good health are needed at delivery.
Taxing the wrong part of installments. With installment settlement, the principal is generally tax-free and interest is taxable.
Ignoring the 403(b). The tax-sheltered annuity is the plan for public school and certain non-profit employees.
Calling a rating a mistake. A rated policy costs more because of the risk; the producer explains why and confirms the client still wants it.
Overlooking cash needs. Final expenses, taxes and debts are immediate cash needs; ongoing living costs are income needs.
Your Next Step
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