Life & Health Insurance Practice Test
Insurance Life Insurance Basics Practice Questions
Life Insurance Basics makes up 5 of every 50 questions on a Tigertest Insurance practice test. Here are 10 of the 20 questions on it, each with the answer and the reason.
Updated by the Tigertest team. General portion only, on the NAIC model and standard prelicensing texts. Your state portion is separate.
1. Maria bought a policy on her husband's life, then they divorced. He dies five years later while she still owns the policy. The insurer will:
- A.Pay his estate instead of the named beneficiary
- B.Pay Maria, since insurable interest existed at application
- C.Deny the claim because insurable interest ended at the divorce
- D.Refund premiums only, since the marriage had ended
Answer: B. For life insurance, insurable interest must exist only when the policy is applied for, not at the time of death. The divorce does not void the policy, so denying the claim for lack of insurable interest at death is wrong.
2. Which of the following would NOT typically have an insurable interest in the life of the proposed insured?
- A.A business relying on the insured as a key employee
- B.A creditor, up to the amount of the debt
- C.The insured's spouse of ten years
- D.A neighbor who has known the insured for years
Answer: D. Insurable interest requires a financial stake or close family tie in the insured's continued life; friendship alone does not qualify. A creditor does have an insurable interest, but only up to the amount owed.
3. Dan, 40, earns $90,000 a year and spends $30,000 of it on himself. He plans to work 25 more years. Before discounting, his human life value is:
- A.$1,500,000
- B.$750,000
- C.$900,000
- D.$2,250,000
Answer: A. Human life value uses the earnings the family would lose: ($90,000 - $30,000) x 25 years = $1,500,000, which is then discounted to present value. $2,250,000 wrongly includes the $30,000 Dan spends on himself.
4. A family needs $20,000 for final expenses, $180,000 to pay off the mortgage and $100,000 for education. Existing group life is $50,000. Using the needs approach, how much more coverage?
- A.$350,000
- B.$200,000
- C.$250,000
- D.$300,000
Answer: C. The needs approach totals the obligations ($20,000 + $180,000 + $100,000 = $300,000) and subtracts existing resources ($50,000), leaving $250,000. $300,000 forgets to subtract the group coverage already in place.
5. The human life value approach to determining how much life insurance a person needs is based on:
- A.The face amount the insured can comfortably afford to pay for
- B.The cash value needed to fund retirement at age 65
- C.The present value of future earnings lost to the family
- D.The total of final expenses, debts and education costs
Answer: C. Human life value measures the insured's economic worth as the present value of the income the family would lose. Totaling specific obligations such as final expenses, debts and education is the needs approach.
6. Hank owns a large farm but has little cash. He worries his heirs would have to sell land to pay estate taxes and debts. Life insurance would provide:
- A.Estate liquidity
- B.Key person protection
- C.Business continuation
- D.Cash accumulation
Answer: A. Death proceeds give heirs cash to pay taxes and debts without a forced sale of illiquid assets, which is estate liquidity. Key person coverage protects a business from losing an employee, not an estate from a cash shortage.
7. Which personal use of life insurance relies on a permanent policy's tax-deferred cash value to help fund future goals such as retirement?
- A.Survivor protection
- B.Estate creation
- C.Final expense coverage
- D.Cash accumulation
Answer: D. Permanent policies build cash value that grows tax-deferred and can be borrowed or withdrawn for later goals, which is the cash accumulation use. Survivor protection pays a death benefit to dependents and does not depend on cash value.
8. A software firm's success depends on its lead engineer. The firm buys a policy on her life to offset lost profits and hiring costs. Who is owner and beneficiary?
- A.The engineer owns it; the firm is beneficiary
- B.The firm is owner, premium payer and beneficiary
- C.The firm owns it; her family is beneficiary
- D.The engineer owns it, and her family is the beneficiary
Answer: B. In key person coverage the business applies for, owns, pays for and is the beneficiary of the policy because the business suffers the loss. Naming her family as beneficiary would make it a personal benefit, not key person protection.
9. Four equal partners set up a cross-purchase buy-sell agreement funded with life insurance. How many policies are needed?
- A.16
- B.12
- C.4
- D.8
Answer: B. In a cross purchase each owner buys a policy on every other owner: 4 x 3 = 12 policies. Four policies would be enough only under an entity purchase, where the business owns one policy on each owner.
10. Five shareholders want a buy-sell plan in which the corporation owns one policy on each of them and redeems a deceased owner's shares. This is called:
- A.A split-dollar arrangement covering each shareholder
- B.A key person plan owned by the company
- C.A cross-purchase plan among the owners
- D.An entity (stock redemption) purchase plan
Answer: D. Under an entity purchase the business buys, owns and is beneficiary of a policy on each owner, then uses the proceeds to buy the deceased owner's interest. In a cross purchase the owners buy policies on each other, so the business would not own them.
Practice all 20 life insurance basics questions, and the rest of the 200-question bank, in the free Insurance training sets. Questions you miss come back until you have mastered them.
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