18 Free Texas Life Insurance Basics & Underwriting Practice Questions (2026)
How to Use This Life Insurance Basics Set
Life Insurance Basics and Risk Concepts is 18 of the scored questions on the Texas Life, Accident & Health exam, and it is the chapter the rest of the exam quietly assumes. Policy types, provisions and statutes all take for granted that you know who the parties are, when insurable interest has to exist, and what an underwriter is allowed to do with an application.
The block that repays drilling most is agent authority. Express, implied and apparent authority read like a taxonomy exercise, and the exam uses them to ask something concrete: is the insurer bound by what the agent told the client?
These 18 questions come from LanePrep's Texas L&H quiz bank and cover the risk concepts and insurable interest rules, the underwriting process and how a risk gets classified, and the authority an agent holds alongside the insurer types they represent.
Insurable interest is a moment, not a state. In life insurance it must exist when the policy is taken out and need not exist at the time of death — the reverse of property insurance, and a favourite trap.
Practice Questions 1-6: Insurable Interest, Hazards and the Parties
Why the rules exist. Insurable interest stops a stranger profiting from a death, the law of large numbers makes pricing possible, and concealment and material misrepresentation are what happens when an applicant works against both.
Question 1 (Chapter 1)
Mr. Chen wishes to purchase a life insurance policy on his neighbor, Mr. Davis, whom he admires greatly but has no financial relationship with. Mr. Chen plans to name himself as the beneficiary. Under Texas insurance law, which of the following statements regarding insurable interest is TRUE?
- A) Mr. Chen has an insurable interest because he admires Mr. Davis, fulfilling the emotional connection requirement.
- B) Mr. Chen must have an insurable interest in Mr. Davis's life at the time of the policy's inception for the policy to be valid.
- C) Insurable interest is only required at the time of the insured's death, not at policy inception.
- D) Any person can purchase a life insurance policy on another person, regardless of insurable interest, as long as the insured consents.
Show answer & explanation
Answer: B
For a life insurance policy to be valid, the policyowner (Mr. Chen) must have an insurable interest in the life of the insured (Mr. Davis) at the time the policy is issued (inception). Insurable interest typically involves a financial or blood relationship, or a legal dependency. Admiration alone does not constitute insurable interest. While the insured's consent is often required, it does not override the insurable interest requirement.
Question 2 (Chapter 1)
Sarah frequently leaves her expensive jewelry visible in her unlocked car while running errands, thinking, 'It's okay, I have insurance to cover it if anything happens.' What type of hazard does Sarah's attitude represent in the context of insurance?
- A) Physical hazard
- B) Moral hazard
- C) Morale hazard
- D) Peril hazard
Show answer & explanation
Answer: C
Sarah's attitude of indifference or carelessness, which increases the likelihood of a loss, is characteristic of a morale hazard. A physical hazard is a physical condition that increases risk (e.g., a heart condition). A moral hazard involves dishonesty or a tendency to defraud (e.g., faking a loss). Peril is the cause of loss itself, not a condition that increases its likelihood.
Question 3 (Chapter 1)
A small town experiences an unusually high number of house fires in a single year, far exceeding the historical average for that community. However, the insurance company that covers most of these homes has a very large pool of policyholders spread across many diverse regions. Which principle of insurance helps this company manage the financial impact of the localized surge in claims?
- A) Principle of Indemnity
- B) Adverse Selection
- C) Law of Large Numbers
- D) Principle of Subrogation
Show answer & explanation
Answer: C
The Law of Large Numbers states that the larger the number of similar exposure units (policyholders) an insurer has, the more accurately they can predict future losses. By having a large and diverse pool of policyholders, the insurer can absorb the impact of a localized spike in claims, as the overall average loss across the larger group remains predictable. The Principle of Indemnity ensures the insured is restored to their pre-loss condition without profiting. Adverse Selection refers to high-risk individuals seeking insurance more often. Subrogation allows the insurer to seek recovery from a negligent third party.
Question 4 (Chapter 1)
A life insurance applicant intentionally fails to disclose a recent diagnosis of a serious heart condition on their application, knowing it would likely result in a higher premium or denial of coverage. This action is an example of what key insurance concept?
- A) Principle of Indemnity
- B) Adverse Selection
- C) Law of Large Numbers
- D) Risk Pooling
Show answer & explanation
Answer: B
Adverse selection occurs when individuals with a higher-than-average risk of loss are more likely to seek out and obtain insurance coverage. By concealing a serious medical condition, the applicant is attempting to obtain coverage at a standard rate despite being a higher risk, which is a classic example of adverse selection. The Principle of Indemnity aims to restore financial condition without profit. The Law of Large Numbers and Risk Pooling are mechanisms insurers use to manage risk, not actions by an applicant.
Question 5 (Chapter 1)
Mr. Smith purchases a large life insurance policy shortly after learning he has a terminal illness, but he intentionally misrepresents his health status on the application to secure coverage he otherwise wouldn't qualify for. This act is an example of a:
- A) Physical hazard
- B) Moral hazard
- C) Morale hazard
- D) Peril
Show answer & explanation
Answer: B
Mr. Smith's intentional misrepresentation and dishonesty to gain from the insurance policy is a clear example of a moral hazard. A physical hazard is a physical condition (like the terminal illness itself). A morale hazard is indifference or carelessness. A peril is the cause of loss (death in this case).
Question 6 (Chapter 1)
John purchases a life insurance policy on his own life, naming his wife, Mary, as the beneficiary. He pays the premiums and retains all rights, such as changing the beneficiary or taking out a loan against the policy's cash value. In this scenario, who is the policyowner?
- A) Mary, as the beneficiary
- B) John, as he controls the policy and pays premiums
- C) The insurance company
- D) Both John and Mary jointly
Show answer & explanation
Answer: B
The policyowner is the individual who possesses all the rights and privileges of the policy, including paying premiums, assigning ownership, changing beneficiaries, and accessing cash values. In this case, John fulfills all these criteria, making him the policyowner. Mary is the beneficiary, and the insurance company is the insurer.
Practice Questions 7-12: Underwriting and Risk Classification
Underwriting is evidence gathering with rules attached. The Medical Information Bureau, attending physician statements and medical examinations all feed a classification, and a substandard rating is an offer to insure at a price, not a refusal.
Question 7 (Chapter 1)
When an individual applies for a life insurance policy, the underwriter often requests information from the Medical Information Bureau (MIB). What is the primary purpose of the MIB?
- A) To provide underwriters with a complete medical history, including all diagnoses and treatments.
- B) To detect and deter misrepresentation and fraud by applicants during the underwriting process.
- C) To calculate the applicant's credit score, which is used to determine premium rates.
- D) To share prescription drug history directly with the insurer without applicant consent.
Show answer & explanation
Answer: B
The MIB is a non-profit organization that maintains a database of medical conditions and other health information reported by member insurance companies. Its primary purpose is to serve as an alert system for underwriters, helping to detect and deter misrepresentation and fraud by applicants who might withhold or falsify information on their applications. It does not provide complete medical histories, nor does it calculate credit scores or share prescription history directly without consent; it provides codes indicating reported impairments.
Question 8 (Chapter 1)
An underwriter reviewing a life insurance application notices that the applicant indicated a history of a specific heart murmur. To gain a more detailed understanding of this condition, the underwriter is most likely to request which of the following?
- A) A credit report from a major credit bureau.
- B) An Attending Physician's Statement (APS) from the applicant's doctor.
- C) A report from the Medical Information Bureau (MIB).
- D) A consumer investigative report on the applicant's lifestyle.
Show answer & explanation
Answer: B
An Attending Physician's Statement (APS) is a detailed report from the applicant's treating physician that provides specific information about their medical history, diagnoses, treatments, and prognosis. This is the most direct way for an underwriter to get in-depth medical information about a specific condition. An MIB report is an alert system, not a detailed medical history. Credit reports and consumer investigative reports provide financial and lifestyle information, respectively, not specific medical details.
Question 9 (Chapter 1)
During the underwriting process for a life insurance policy, an applicant is determined to have a medical condition that significantly increases their risk of early mortality, but it is still manageable with a higher premium. The underwriter will likely classify this applicant as:
- A) Preferred risk
- B) Standard risk
- C) Substandard risk
- D) Declined risk
Show answer & explanation
Answer: C
A substandard risk (also known as a 'rated' risk) is an applicant who presents a higher-than-average risk of loss but is still insurable. They typically pay higher premiums to compensate the insurer for the increased risk. Preferred risks are those with excellent health and lifestyle, standard risks are average, and declined risks are uninsurable.
Question 10 (Chapter 1)
During the underwriting process for a new life insurance policy, an applicant discloses that they frequently participate in extreme sports, such as skydiving and competitive rock climbing. While these activities are not illegal or dishonest, they are known to significantly increase the likelihood of accidental injury or death.
- A) A moral hazard
- B) A morale hazard
- C) A physical hazard
- D) Adverse selection
Show answer & explanation
Answer: C
A physical hazard is a physical condition, characteristic, or activity that increases the chance of loss. Engaging in extreme sports is a physical hazard because it directly increases the risk of injury or death. A moral hazard involves dishonesty or character flaws. A morale hazard is carelessness or indifference. Adverse selection is the tendency of higher-risk individuals to seek insurance.
Question 11 (Chapter 1)
An applicant for a life insurance policy undergoes a medical examination. The results, combined with their medical history, reveal a severe, rapidly progressing terminal illness that is expected to result in death within a few months. The underwriter determines that the risk of insuring this individual is far too high and cannot be reasonably managed, even with significant premium adjustments.
- A) Standard Risk
- B) Preferred Risk
- C) Substandard Risk
- D) Declined Risk
Show answer & explanation
Answer: D
A Declined Risk classification means the insurer refuses to issue coverage because the risk presented by the applicant is too high or uninsurable. Standard risks are average. Preferred risks are healthier than average. Substandard risks have higher-than-average risk but are still insurable, usually with higher premiums or modified terms. A rapidly progressing terminal illness typically leads to a declined classification.
Question 12 (Chapter 1)
An insurance company, 'Alpha Life,' underwrites a life insurance policy with an exceptionally high death benefit of $100 million for a very wealthy client. To mitigate the potential financial impact of such a large claim on its own reserves, Alpha Life transfers a portion of this risk, say $75 million, to another insurance company, 'Beta Re.'
- A) A Fraternal Benefit Society
- B) A Mutual Company
- C) A Reinsurer
- D) A Captive Insurer
Show answer & explanation
Answer: C
A reinsurer is an insurance company that insures other insurance companies. In this scenario, Beta Re is accepting a portion of the risk from Alpha Life, acting as a reinsurer to help Alpha Life manage its exposure to large claims. Fraternal Benefit Societies and Mutual Companies are types of primary insurers, and a Captive Insurer is typically owned by a non-insurance entity to insure its own risks.
Practice Questions 13-18: Agent Authority and Insurer Types
Who the agent is acting for, and how far that goes. Express authority is written into the contract, implied authority is what the job obviously requires, and apparent authority is what the client reasonably believes — which can bind the insurer to something it never agreed. Stock, mutual and fraternal insurers differ in who owns them.
Question 13 (Chapter 1)
Maria, a life insurance agent, explains to a client that her authority to bind the insurer to certain agreements is explicitly granted in her written agency contract. This type of authority is known as:
- A) Implied authority
- B) Apparent authority
- C) Express authority
- D) Fiduciary authority
Show answer & explanation
Answer: C
Express authority is the authority explicitly given to an agent in writing through the agency agreement. Implied authority is not explicitly stated but is necessary for the agent to carry out their express duties. Apparent authority is created when the insurer gives the impression to third parties that the agent has certain authority, even if they do not. Fiduciary authority refers to the agent's responsibility to act in the best interest of the client and insurer.
Question 14 (Chapter 1)
An insurance agent is authorized by their agency contract to solicit applications and collect initial premiums. When a client hands the agent the first premium payment, the agent issues a binding receipt, even though the contract does not explicitly state the agent can issue receipts. This action is generally covered under which type of agent authority?
- A) Express authority
- B) Implied authority
- C) Apparent authority
- D) Fiduciary authority
Show answer & explanation
Answer: B
Implied authority is not explicitly stated in the agency contract but is reasonably necessary for the agent to carry out their express duties. If an agent is authorized to collect premiums (an express duty), it is implied that they can issue a receipt for that collection. Express authority is written, and apparent authority is based on the insurer's actions giving the impression of authority to a third party. Fiduciary authority relates to trust and responsibility.
Question 15 (Chapter 1)
An agent, without explicit instruction from the insurer, tells a client that their new life insurance policy will cover a specific, unusual risk not mentioned in the policy document, because 'it's generally understood to be included.' The client relies on this statement. If a claim arises from this risk, and the insurer denies it because it's not in the contract, what type of authority might the client argue the agent possessed?
- A) Express authority
- B) Implied authority
- C) Apparent authority
- D) Fiduciary authority
Show answer & explanation
Answer: C
Apparent authority is the authority a third party (the client) reasonably believes an agent has based on the actions, words, or inactions of the principal (the insurer). Even if the agent lacked express or implied authority to make such a promise, the insurer's failure to correct the agent or the general appearance of the agent representing the company could lead a reasonable person to believe the agent had such authority. Express authority is written, and implied authority is necessary to perform express duties. Fiduciary authority relates to trust and responsibility.
Question 16 (Chapter 1)
An insurance company is owned by its stockholders, who receive dividends when the company makes a profit. This company issues non-participating policies, meaning policyholders do not receive dividends. What type of insurer is this?
- A) Mutual Company
- B) Fraternal Benefit Society
- C) Stock Company
- D) Reinsurer
Show answer & explanation
Answer: C
A stock company is owned by its stockholders, who invest in the company and share in its profits through dividends. Stock companies typically issue non-participating policies, meaning policyholders do not receive dividends. Mutual companies are owned by their policyholders and often issue participating policies that pay dividends to policyholders. Fraternal benefit societies are non-profit organizations that provide insurance to their members. Reinsurers provide insurance to other insurance companies.
Question 17 (Chapter 1)
A life insurance company is structured such that its policyholders are considered owners and have the right to vote for members of the board of directors. If the company generates a surplus, policyholders may receive dividends. What type of insurer is this?
- A) Stock Company
- B) Mutual Company
- C) Fraternal Benefit Society
- D) Lloyd's of London
Show answer & explanation
Answer: B
A mutual company is owned by its policyholders, who typically have voting rights and may receive dividends (which are considered a return of unused premium — an overpayment — not taxable income) if the company performs well. Stock companies are owned by stockholders. Fraternal benefit societies are non-profit and provide insurance to members. Lloyd's of London is a marketplace for insurance, not a single insurer.
Question 18 (Chapter 1)
A non-profit organization, established primarily for the benefit of its members who share a common religious affiliation, offers life insurance coverage to its members. This organization is governed by a lodge system and often engages in charitable activities within its community.
- A) A Stock Company
- B) A Mutual Company
- C) A Fraternal Benefit Society
- D) A Reinsurer
Show answer & explanation
Answer: C
A Fraternal Benefit Society is a non-profit organization that provides insurance to its members, often based on a common bond like religion or occupation, and operates under a lodge system. Stock companies are owned by stockholders and issue non-participating policies. Mutual companies are owned by policyholders and may issue participating policies. A reinsurer provides insurance to other insurers.
The Basics Mistakes That Cost Marks
Requiring insurable interest at the time of death. Life insurance needs it at inception only. A policy stays valid after a divorce or the sale of a business, and the exam builds scenarios precisely on that.
Reading apparent authority as no authority. If the insurer allowed the client to reasonably believe the agent could act, the insurer can be bound anyway. The question is what the client could reasonably conclude, not what the agency contract says.
Treating a substandard rating as a decline. A rated policy is issued, at a higher premium, for a risk the underwriter judged worse than standard. Declining is a separate outcome.
Confusing the owner with the insured. The policyowner controls the contract and the insured is the life it covers, and they are frequently different people — in key person cover they always are.
All nine chapters are audio lessons — chapter 1 is free, no signup. The heavier blocks have their own sets: life policy types, health insurance and Texas insurance law.
Question counts and content weighting come from the Pearson VUE Texas examination content outline. Read September 2026.
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