A person buys a life insurance policy on the life of a business partner. When must an insurable interest in that partner's life exist?
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About this test
This is a free 15-question sampler for the life insurance portion of a US state producer licensing exam, written by the StudyPDF team. It covers term, whole and universal life, variable products, nonforfeiture options, riders, annuities, underwriting and application rules, policy provisions, beneficiaries and a little general health coverage, mixing multiple choice, select all that apply and fill in the blank. Answer all 15 questions, then check your score and read the explanation for every question.
All 15 questions at a glance
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1.A person buys a life insurance policy on the life of a business partner. When must an insurable interest in that partner's life exist?
- A. At the time of the claim only
- B. At both the time of the application and the time of the claim
- C. At the time the policy is applied for
- D. At the time the first premium is invoiced
Answer: C. At the time the policy is applied for
In life insurance the insurable interest has to exist when the policy is applied for and issued. It does not have to still exist at death, so a policy that was valid when issued is still paid after, for example, a business partnership dissolves. That is the opposite of property insurance, where the interest must exist at the time of the loss. The reason for the rule is to keep people from buying policies on strangers, which would turn a protection contract into a wager on a death. Spouses, parents and children, and business partners with a financial stake are the usual examples of a valid interest.
2.A couple wants coverage that pays off their mortgage if either dies, with the benefit shrinking as the loan balance falls. Which policy fits best?
- A. Increasing term
- B. Decreasing term
- C. Whole life paid up at age 65
- D. Level term renewable to age 100
Answer: B. Decreasing term
Decreasing term has a death benefit that drops over the policy period, usually on a schedule that tracks the declining balance of a loan. The premium normally stays level while the benefit falls, which is why it costs less than a level term policy of the starting amount. Term insurance pays only if death occurs inside the stated period and builds no cash value. Whole life and long renewable term cost more because they cover a need the couple does not have here, which is a benefit that never shrinks.
3.Which feature most clearly separates universal life from traditional whole life?
- A. A cash value that grows tax deferred
- B. Lifetime protection as long as the policy stays in force
- C. A death benefit paid to a named beneficiary
- D. Flexible premiums and an adjustable death benefit
Answer: D. Flexible premiums and an adjustable death benefit
Universal life unbundles the policy into a term insurance charge, expense charges and a cash account that earns interest, and it lets the owner change the premium and, within limits, the death benefit. Traditional whole life has fixed premiums, a fixed death benefit and a guaranteed schedule of cash values. Tax deferred cash value, lifetime coverage and a beneficiary payout are shared by both kinds of permanent insurance. Flexibility cuts both ways, because a universal policy can lapse if the owner pays too little for the cash account to cover the monthly charges.
4.In a variable life insurance policy, who carries the investment risk of the separate account, and what does a producer need beyond an insurance license to sell it?
- A. The policy owner, and securities registration as well
- B. The insurer, and nothing beyond the insurance license
- C. The insurer, and a real estate license
- D. The policy owner, and nothing beyond the insurance license
Answer: A. The policy owner, and securities registration as well
Variable products put the cash value in subaccounts chosen by the owner, so the owner takes the investment gain or loss and the cash value is not guaranteed. Because the product has a securities component, it is sold with a prospectus and the producer must also hold the securities registration the regulators require, in addition to the state insurance license. Exactly which securities license applies is a matter for the regulators and your sponsoring firm. Fixed products work the other way round, because the insurer guarantees an interest rate and carries the investment risk.
5.A whole life policy has built cash value. The owner stops paying premiums and makes no election. In many policies, which nonforfeiture option applies automatically?
- A. Cash surrender
- B. Reduced paid-up insurance
- C. Extended term insurance
- D. A policy loan for the full cash value
Answer: C. Extended term insurance
Nonforfeiture options exist so that a policy owner who stops paying does not lose the value already built up. The three are cash surrender, reduced paid-up insurance and extended term insurance. Extended term keeps the full original face amount in force for as long as the cash value can buy at the insured's attained age, and it is the usual default when the owner does not choose, though the contract states what applies. Reduced paid-up buys a smaller amount of whole life for life, and cash surrender ends the coverage and pays the cash value.
6.An insured becomes totally disabled under the policy's definition. Which rider keeps the policy in force by having the insurer cover the premiums?
- A. Guaranteed insurability rider
- B. Waiver of premium rider
- C. Accidental death rider
- D. Cost of living rider
Answer: B. Waiver of premium rider
A waiver of premium rider stops the premiums during a qualifying disability, usually after a waiting period, while the policy and its cash value stay fully in force. A guaranteed insurability rider lets the owner buy more coverage at set future dates without new medical evidence. An accidental death rider pays an extra amount if death results from an accident. A cost of living rider adjusts the coverage to follow inflation. Riders are contract changes bought for an extra premium, and each one has its own definitions and exclusions.
7.What does the incontestable clause in a life insurance policy do?
- A. It limits the insurer's right to void the policy for misstatements in the application once the contestable period has passed
- B. It stops the insurer from ever denying a claim for any reason
- C. It prevents the owner from changing the beneficiary
- D. It guarantees the premium cannot rise during the first year
Answer: A. It limits the insurer's right to void the policy for misstatements in the application once the contestable period has passed
During the contestable period, which state law and the policy fix and which is commonly two years, the insurer may investigate and rescind for a material misrepresentation in the application. After that window the policy generally cannot be contested for those statements. The clause does not stop the insurer from refusing a claim for other reasons that remain valid, such as a lapse for unpaid premiums, and it does not protect against fraud in every state. Check how your state words the rule and what the policy exclusions say.
8.An applicant pays the first premium with the application and receives a conditional receipt. What does that receipt generally mean?
- A. Coverage is guaranteed from the day the producer signs the application, whatever the health history
- B. Coverage is bound as of the date of the application or the medical exam, whichever is later, if the applicant proves insurable as applied for
- C. The policy is issued only after the applicant makes a second payment
- D. The insurer cannot decline the application
Answer: B. Coverage is bound as of the date of the application or the medical exam, whichever is later, if the applicant proves insurable as applied for
A conditional receipt gives temporary coverage that depends on a condition: the insurer would have issued the policy as applied for at standard rates. If the applicant dies before the policy is delivered, the insurer checks whether that condition was met, and coverage then reaches back to the date stated in the receipt, commonly the later of the application and the medical exam. A receipt without an advance payment generally does not bind coverage until delivery. The exact wording is in the receipt, so read it as the contract.
9.In an individual disability income policy, what is the elimination period?
- A. The time after a disability begins before benefits become payable
- B. The maximum length of time benefits can be paid
- C. The time after policy issue before any claim is accepted
- D. The portion of each claim the insured pays after the benefit starts
Answer: A. The time after a disability begins before benefits become payable
The elimination period works like a time deductible: benefits do not start until the insured has been disabled for that long. A longer period lowers the premium, because the insurer pays fewer short claims. The benefit period is how long payments last once they start. A probationary period is a separate waiting time at the start of the contract during which certain sickness claims are not covered. Disability income replaces part of earned income, so the exam tends to pair it with definitions of disability and how much income the insured can replace.
10.Which of the following are settlement options, meaning ways a beneficiary can take the death benefit?
Select all that apply.
- A. Lump sum
- B. Interest only
- C. Reduced paid-up insurance
- D. Life income
- E. Extended term insurance
- F. Cash surrender
Answer: A. Lump sum, B. Interest only, D. Life income
Settlement options deal with how death proceeds are paid out: a lump sum, interest only with the principal held for later, installments over a fixed period or in a fixed amount, and a life income that pays for the beneficiary's lifetime. Reduced paid-up, extended term and cash surrender are the three nonforfeiture options, which apply to a living owner who stops paying premiums. This pair is a standard exam trap, so remember the timing: settlement options come after a death and nonforfeiture options come after a lapse.
11.Which statements about annuities are correct?
Select all that apply.
- A. An annuity is designed to protect against outliving your income, where life insurance protects against dying early
- B. In a variable annuity the contract owner bears the investment risk
- C. Annuitization turns the accumulated value into a stream of income payments
- D. A straight life annuity continues to pay the heirs for 20 years after the annuitant dies
- E. Fixed annuity values fall whenever the stock market falls
Answer: A. An annuity is designed to protect against outliving your income, where life insurance protects against dying early, B. In a variable annuity the contract owner bears the investment risk, C. Annuitization turns the accumulated value into a stream of income payments
An annuity has two phases, accumulation, when money goes in and earnings are generally tax deferred under federal rules, and the payout phase, when annuitization converts the value to income. In a fixed annuity the insurer guarantees interest and carries the risk. In a variable annuity the owner picks subaccounts and carries the market risk, which is why it needs securities registration to sell. A straight life option pays only while the annuitant lives. A period certain option is what guarantees payments to a beneficiary for a stated number of years. Tax treatment is a federal and state matter, and nothing here is tax advice.
12.Which statements about beneficiary designations are correct?
Select all that apply.
- A. A contingent beneficiary is paid only if the primary beneficiary has died before the insured
- B. The owner can change a revocable beneficiary without the beneficiary's consent
- C. Changing an irrevocable beneficiary generally requires the beneficiary's written consent
- D. An insurer typically pays a minor child directly without any guardian or trust
- E. The beneficiary is the person whose life is insured
Answer: A. A contingent beneficiary is paid only if the primary beneficiary has died before the insured, B. The owner can change a revocable beneficiary without the beneficiary's consent, C. Changing an irrevocable beneficiary generally requires the beneficiary's written consent
The three roles are separate: the owner controls the contract, the insured is the life covered and the beneficiary receives the proceeds. A revocable designation can be changed by the owner alone. An irrevocable one gives the beneficiary a vested right, so changing it needs their consent. A contingent beneficiary only takes if the primary cannot. A minor generally cannot receive and manage a large sum directly, so the proceeds usually go to a court appointed guardian, or the owner names a trust or a custodian under state law. Who counts as a lawful beneficiary is decided by state law.
13.Complete the sentence.
A whole life policy has a $200,000 death benefit. The owner has an outstanding policy loan of $15,000 with $1,000 of unpaid interest when the insured dies. The insurer pays the beneficiary _____.
Options for blank 1: $185,000, $184,000, $200,000, $216,000
Answer: $184,000
Any loan balance plus unpaid interest is deducted from the proceeds at death, so $200,000 minus $16,000 is $184,000. Borrowing against a policy does not reduce its coverage while the insured lives, and the insurer charges interest on the loan, but the unpaid amount comes out of the claim. If loans and interest grow beyond the cash value, the policy can lapse, which also has tax consequences that belong with a tax professional.
14.Complete the sentence.
An applicant understated age. The premium paid was $400 a year, but the premium for the true age is $500 a year. The face amount is $100,000. Under the misstatement of age provision, the insurer pays _____.
Options for blank 1: $100,000, $90,000, $80,000, $75,000
Answer: $80,000
The provision does not void the policy. It adjusts the benefit to what the premium actually paid would have bought at the true age: $100,000 times $400 over $500 is $80,000. If the age had been overstated, the premium paid would have been too high and the insurer would refund the excess or raise the benefit. The provision is why an age error alone is usually not grounds to cancel coverage.
15.Complete the sentence.
Under federal tax rules, a life insurance policy funded faster than the seven-pay test allows is treated as a _____. Money taken out of it during the insured's life is generally taxed _____.
Options for blank 1: term conversion, modified endowment contract, split-dollar plan, paid-up addition
Options for blank 2: basis first, gain last, only at the insured's death, gain first, basis last, at no point
Answer: modified endowment contract, gain first, basis last
A policy that fails the seven-pay test becomes a modified endowment contract, or MEC. It keeps the income tax free death benefit, but loans and withdrawals are generally taxed gain first, and a distribution before age 59 and a half can carry a 10 percent additional tax on the gain. A regular permanent policy usually lets withdrawals up to basis come out first. Exams ask for the concept and the order, and the details belong with a tax professional, since this is not tax advice.
What the life insurance exam actually tests
There is no single national life insurance exam. Each state's insurance department decides who may sit for a producer license, which lines of authority exist, how long each exam is, what score passes and how much state law the test contains. Many states pair life with health, some test them separately, and the question counts and passing scores differ from state to state and from line to line. Most states publish a candidate handbook through their testing vendor with the exact content outline, so that free document is the first thing to download.
What nearly every state shares is the general knowledge outline: how insurance works, the policy types, how a policy is built from its provisions and riders, how annuities differ from life insurance, how applications and underwriting work, and what the producer owes the client. On top of that sits a block of your own state's insurance law, covering licensing, replacement rules, advertising and disclosure. That state block is the part no national question set can cover.
This sampler stays on the shared ground, with one general health coverage question so the mix looks like a combined life and health exam. Nothing on this page is legal, tax or financial advice, and where a figure depends on the state or on the policy contract, the explanation says so.
How to use this sampler and how to study the material
Take all 15 questions in one sitting without notes, then read the explanation for every question, including the ones you got right. A lucky guess and real understanding score the same here and very differently on exam day. When you miss a question, treat it as a topic. If you missed the nonforfeiture question and the cash value question, review how a permanent policy builds and pays out its cash value as one idea, because the exam asks about it from several angles.
Life insurance questions turn on exact vocabulary. The owner, the insured and the beneficiary are three different roles. A nonforfeiture option is not a settlement option. A rider changes the contract, a provision is built into it, and an annuity protects against outliving your money while life insurance protects against dying too early. Keep a running list of the pairs you confuse and drill those against each other instead of rereading the chapter.
Do the math with a pencil. Loan balances, age adjustments and proportional benefits all follow the same steps: find the base, apply the rule the contract uses, and check whether the question asks for the full figure or one part of it. Then work through your state's insurance law separately, since none of it is covered here.
How StudyPDF builds full practice tests from your prep book
Fifteen questions can show you where you are shaky. They cannot get you exam ready, and a general bank says nothing about the state law block of your own exam.
StudyPDF works from your own material instead. Upload the prep book you bought, the packet from your pre-licensing course, the candidate handbook your state published or the slides your instructor used, and Bo, the study agent, builds full length practice tests from those exact pages. Every question is grounded in your material, and every explanation points back to where the answer came from, so you can go straight to the source when something looks off. Regenerate fresh tests as often as you like, narrow them to one area such as annuities or policy provisions, and see which concepts you keep missing.
You do not need to upload anything to start. If your course materials are still in the mail, name a topic instead, for example nonforfeiture options or the incontestable clause, and Bo writes a practice test from that. Starting is free, and it fits around a job, which is how most people prepare for a license.
Written by the StudyPDF team. Last updated August 19, 2026.
Good to know
Is this life insurance practice test free?
Yes. All 15 questions, the score screen and every explanation are free to play in your browser, and you can retake the test as often as you want. There is no paywall on this page.
How many questions is the life insurance exam, and what score passes?
Your state sets both, along with the time limit, the retake rules and any pre-licensing education. The numbers also differ by line of authority, and some states test life and health together while others test them separately. Download your state's candidate handbook for the current figures instead of trusting a rule of thumb.
Does this cover my state's insurance law?
No. These questions cover the general knowledge both life and health candidates are expected to know. Every state also tests its own insurance law, such as licensing, replacement rules, advertising and disclosure. Study that part from your state's candidate handbook and your course materials.
Who wrote these questions, and can I get more from my own prep book?
The StudyPDF team wrote every question and explanation from the general content outlines. They are not real exam questions, and none come from a prep provider's bank. StudyPDF is not affiliated with any state insurance department, testing vendor or prep school, and nothing here is legal, tax or financial advice. For more, upload your prep book or course packet and Bo builds full length practice tests from your exact pages, or just name a topic if you have nothing to upload.
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