17 Free Texas Life Agent Practice Questions: Retirement Plans, Group Life, Taxes and Suitability (2026)

Question 1 (Chapter 6)

An insured individual in Texas, diagnosed with a terminal illness, is considering options for accessing funds from their life insurance policy. They are offered two choices: either a life settlement from a third-party investor or accelerated death benefits from their insurer. What is a key tax distinction between the proceeds received from an accelerated death benefit and a life settlement for a terminally ill insured?

• A) Both are generally subject to ordinary income tax.
• B) Life settlement proceeds are always tax-free, while accelerated benefits are taxable.
• C) Both are considered a return of premium and are never taxed.
• D) Accelerated death benefits are generally received income tax-free, while life settlement proceeds may be taxable.

Question 2 (Chapter 6)

An insurance agent is helping a young couple with two children in Texas determine how much life insurance they need. The couple wants to ensure their children's future education and their surviving spouse's living expenses are covered, rather than just replacing a specific income stream. Which method of determining life insurance needs would be most appropriate for this couple's goals, and why?

• A) Human Life Value approach, because it calculates the present value of the insured's future earnings.
• B) Capital Retention approach, because it focuses on maintaining a specific capital amount for heirs.
• C) Buy-Sell agreement, because it ensures business continuity.
• D) Needs approach, because it considers specific financial obligations and goals like education and living expenses.

Question 3 (Chapter 6)

A Texas couple establishes an irrevocable trust to own a life insurance policy on their lives, with their minor children named as beneficiaries. The trust will manage the policy and distribute the death benefit to the children upon the parents' passing. This arrangement is an example of what type of policy ownership?

• A) Third-party ownership
• B) Individual ownership
• C) Joint ownership
• D) Beneficiary ownership

Question 4 (Chapter 6)

A Texas company offers its employees a retirement plan where a portion of their salary is deferred on a pre-tax basis, and the employer may also make matching contributions. The plan's investment growth is tax-deferred. What type of qualified retirement plan is this most likely to be?

• A) A 401(k) plan
• B) A Traditional IRA
• C) A Roth IRA
• D) A SEP IRA

Question 5 (Chapter 6)

A Texas resident passes away, leaving behind a dependent spouse, two minor children, and a dependent parent who relied on the deceased for at least half of their support. Assuming the deceased was fully insured under Social Security, which of these individuals would generally be eligible for Social Security survivor benefits?

• A) Only the dependent spouse and minor children.
• B) Only the minor children.
• C) Only the dependent parent, as the spouse and children have other resources.
• D) The dependent spouse, minor children, and the dependent parent.

Question 6 (Chapter 6)

A 55-year-old Texas resident owns a whole life insurance policy with a $40,000 cost basis and a $60,000 cash value. They no longer need the death protection and wish to move the entire $60,000 into a new non-qualified deferred annuity to provide retirement income. If they use a Section 1035 exchange, what is the immediate tax consequence?

• A) They must pay ordinary income tax on the $20,000 gain at the time of the transfer.
• B) The $20,000 gain is taxed as a capital gain in the year of the exchange.
• C) There is no immediate tax consequence, and the cost basis of the new annuity becomes $40,000.
• D) The exchange is prohibited because life insurance cannot be exchanged for an annuity under Section 1035.

Question 7 (Chapter 6)

A Texas corporation implements a Section 162 Executive Bonus Plan for its Vice President. The corporation pays the premiums for a whole life policy owned by the Vice President. How are these premiums treated for tax purposes?

• A) The premiums are non-deductible for the corporation and tax-free to the executive.
• B) The premiums are deductible for the corporation only if the executive names the corporation as beneficiary.
• C) The premiums are deductible for the corporation as a business expense and taxable as income to the executive.
• D) The premiums are tax-deferred for the executive until the policy is surrendered.

Question 8 (Chapter 6)

A teacher at a Texas public school wants to contribute to a retirement plan through a salary reduction agreement. Which plan is specifically designed for employees of public schools and certain non-profit organizations?

• A) 401(k) Plan
• B) SIMPLE IRA
• C) 403(b) Tax-Sheltered Annuity (TSA)
• D) Section 457 Plan

Question 9 (Chapter 6)

An agent is explaining the tax benefits of a 'Split-Dollar' life insurance plan to a business owner in Amarillo. In a typical endorsement-style split-dollar plan:

• A) The employee pays the entire premium, but the employer owns the cash value.
• B) The IRS considers the plan a qualified retirement plan.
• C) The employer is allowed to deduct the premiums as a business expense.
• D) The employer and employee split the death benefit, and the employer owns the policy.

Question 10 (Chapter 6)

A 52-year-old client in El Paso owns a life insurance policy that has been classified as a Modified Endowment Contract (MEC). The client takes a $10,000 loan from the policy's cash value. Which of the following is true regarding the tax treatment of this loan?

• A) The loan is tax-free because it is a policy loan.
• B) The loan is taxable as a capital gain, but only if the policy is surrendered.
• C) The 10% penalty is waived because the client is over age 50.
• D) The loan is taxable as ordinary income to the extent of gain in the policy, plus a 10% federal penalty.

Question 11 (Chapter 6)

In a group life insurance arrangement, who is responsible for applying for the policy, maintaining the records, and making premium payments to the insurer?

• A) The Certificate Holder (Employee)
• B) The Underwriter
• C) The Master Policyholder (Employer)
• D) The Texas Department of Insurance

Question 12 (Chapter 6)

Which of the following retirement plans is specifically restricted to employees of public schools and certain non-profit 501(c)(3) organizations?

• A) SIMPLE IRA
• B) 401(k) Plan
• C) 403(b) Tax Sheltered Annuity (TSA)
• D) Keogh Plan (HR-10)

Question 13 (Chapter 6)

In a 'Collateral Assignment' Split-Dollar life insurance plan, who is typically the owner of the policy?

• A) The Employer
• B) The Employee
• C) The Insurer
• D) The Texas Department of Insurance

Question 14 (Chapter 6)

A Houston-based engineering firm provides a noncontributory group life insurance plan to its 50 full-time employees. One employee, who has a history of heart disease, is worried about being excluded from the plan. Under Texas Insurance Code Chapter 1131, how must the insurer handle this employee's eligibility?

• A) The insurer may exclude the employee based on individual medical underwriting.
• B) The insurer can charge the employee a higher individual premium while keeping others at the base rate.
• C) The insurer must cover the employee because noncontributory plans require 100% participation of eligible members.
• D) The employee must provide evidence of insurability before being added to the master contract.

Question 15 (Chapter 6)

A client in El Paso owns a deferred annuity with a significant gain and wants to exchange it for a Whole Life insurance policy to provide a tax-free death benefit for his children. How will the IRS treat this under Section 1035?

• A) It is a tax-free exchange because both are life insurance products.
• B) It is a taxable event because an annuity cannot be exchanged for a life insurance policy under Section 1035.
• C) It is tax-free only if the client is over age 59 1/2.
• D) It is tax-free only if the death benefit is less than the annuity's value.

Question 16 (Chapter 6)

A policyowner surrenders a whole life policy for its $50,000 cash value. He has paid $40,000 in total premiums and previously received $5,000 in dividends in cash. What is the taxable gain on this surrender?

• A) $5,000
• B) $15,000
• C) $10,000
• D) $50,000

Question 17 (Chapter 6)

A new employee at a firm in Tyler is told they must wait 90 days before they can join the group life insurance plan. This 90-day period is known as the:

• A) Enrollment period
• B) Contestability period
• C) Probationary period
• D) Grace period