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Types of Life Insurance Policies: Practice Questions

20 free practice questions with explanations. Pick an answer for each, then check your score.

Exam weight: 15 of 100 scored questions on the Life and Health general knowledge exam. Updated 2026-11-04.

Quick study guide

This section of the exam tests whether you can tell the main kinds of life insurance and annuities apart. Most questions describe a feature (level premium, flexible premium, investment risk, coverage that shrinks) and ask which product it belongs to.

Term vs. permanent

Term life covers a set period, such as 10, 20 or 30 years, and pays only if the insured dies during that period. It has no cash value, so it is the cheapest coverage at first. Term comes as level (same death benefit throughout), decreasing (benefit shrinks, often to match a mortgage), annually renewable (premium rises each year) and return of premium (refunds premiums if the insured outlives the term). Two features matter: renewable (extend the term without proving good health, at a premium based on the insured's age at renewal) and convertible (switch to permanent coverage without proving good health).

Permanent life lasts for life, as long as premiums are paid or the cash value covers the charges, and it builds cash value.

Product	Premium	Cash value	Who bears investment risk
Ordinary whole life	Level, payable for life	Guaranteed	Insurer
Limited-pay / single-premium whole life	Level, paid over a shorter period (or once)	Guaranteed, builds faster	Insurer
Universal life	Flexible	Credited interest, with a guaranteed minimum	Insurer (above the minimum, the owner gets current rates)
Indexed universal life	Flexible	Interest linked to a market index, limited by caps, usually with a 0% floor	Shared: insurer guarantees the floor
Variable whole life	Fixed	Invested in subaccounts, not guaranteed	Policyowner
Variable universal life	Flexible	Invested in subaccounts, not guaranteed	Policyowner

Annuities

An annuity is the reverse of life insurance: it pays income while the annuitant is alive. Money grows tax-deferred during the accumulation period; income comes during the payout (annuity) period. An immediate annuity is bought with one premium and usually starts paying within a year; a deferred annuity accumulates first. In a fixed annuity the insurer guarantees a minimum rate; in a variable annuity the owner chooses investments and bears the risk; an indexed annuity credits interest linked to an index. The life only payout option pays the most per month but stops at death with nothing left over.

Policies on two lives

Joint life (first-to-die) pays when the first insured dies. Survivorship life (second-to-die) pays only after both have died, which makes it a common tool for paying estate costs.

Practice questions

Which statement best describes ordinary (straight) whole life insurance?
1. A.The premium rises every year as the insured gets older.
2. B.The premium is level and payable for life, and the policy builds guaranteed cash value.
3. C.Coverage lasts for a set number of years and then ends.
4. D.The cash value is invested in subaccounts chosen by the policyowner.
Show answer
Answer: B. Ordinary whole life charges a level premium for the insured's whole life (until death or the policy's maturity age) and builds guaranteed cash value. A rising yearly premium describes annually renewable term, a set number of years describes term life, and owner-chosen subaccounts describe variable life.
Source: Texas content outline I.A.1; Texas Department of Insurance: Life insurance guide
A 20-pay whole life policy:
1. A.Requires premiums for 20 years and covers the insured for life.
2. B.Covers the insured for 20 years and then expires.
3. C.Has a lower annual premium than ordinary whole life for the same face amount.
4. D.Pays the face amount after 20 years even if the insured is alive.
Show answer
Answer: A. Limited-pay whole life squeezes the premiums into a set period (here 20 years), but coverage is still permanent. Because the same lifetime cost is paid over fewer years, each premium is higher than ordinary whole life, not lower. Paying the face amount to a living insured at a set date describes an endowment.
Source: Texas content outline I.A.2
Which is true of single-premium whole life insurance?
1. A.Premiums are paid monthly for the insured's lifetime.
2. B.It builds cash value immediately and is usually treated as a modified endowment contract (MEC).
3. C.It has no cash value until the tenth policy year.
4. D.Coverage ends when the insured reaches age 65.
Show answer
Answer: B. One lump-sum premium creates cash value right away. Because the policy is funded faster than the federal seven-pay test allows, it is generally a MEC, so loans and withdrawals are taxed as gain first and may carry a 10% additional tax before age 59½. Coverage is still for life.
Source: Texas content outline I.A.2 and IV.G.3; 26 U.S.C. § 7702A (modified endowment contract); 26 U.S.C. § 72(e)(10) and (v) (tax on MEC distributions)
Under a universal life policy's Option B (also called Option 2) death benefit, the beneficiary receives:
1. A.The face amount plus the cash value.
2. B.The cash value only.
3. C.The face amount minus the cash value.
4. D.The face amount only.
Show answer
Answer: A. Option B is the increasing death benefit: the insurer pays the specified face amount plus the cash value. Option A (Option 1) is the level death benefit, where the cash value is part of the face amount rather than added to it.
Source: Texas content outline I.B.1
A universal life policyowner may skip a premium payment without the policy lapsing as long as:
1. A.The insurer approves the skipped payment in writing.
2. B.The policy has been in force for at least two years.
3. C.The insured provides new evidence of insurability.
4. D.The cash value is enough to cover the monthly cost of insurance and expense charges.
Show answer
Answer: D. Universal life deducts the cost of insurance and expenses from the cash value each month. If the cash value can cover those charges, a missed premium does not cause a lapse. If the cash value runs out, the policy can end, which is why the Texas Department of Insurance warns that changes can affect how long coverage lasts.
Source: Texas content outline I.B.1; Texas Department of Insurance: Life insurance guide
Which statement about variable whole life insurance is true?
1. A.Its premiums are flexible.
2. B.Its cash value depends on investments the policyowner chooses, so the policyowner bears the investment risk.
3. C.Its cash value is guaranteed by the insurer.
4. D.Its death benefit can never be more than the original face amount.
Show answer
Answer: B. Variable whole life has a fixed premium, and its cash value rises or falls with the subaccounts (typically mutual funds) the owner chooses, so the owner can lose money. The death benefit has a guaranteed minimum but can grow above the face amount when investments do well. Flexible premiums describe variable universal life.
Source: Texas content outline I.B.2; SEC Investor.gov: Variable life insurance
In Texas, an agent who sells variable life insurance must hold:
1. A.Only a Texas life insurance agent license.
2. B.Both a federal securities license and a state insurance license.
3. C.Only a federal securities registration.
4. D.A property and casualty license.
Show answer
Answer: B. Variable life is both insurance and a security. The Texas Department of Insurance states that agents who sell it in Texas must have a federal securities license and a state insurance license.
Source: Texas Department of Insurance: Life insurance guide
Which product combines flexible premiums with investment subaccounts chosen by the policyowner?
1. A.Variable universal life
2. B.Indexed universal life
3. C.Decreasing term life
4. D.Ordinary whole life
Show answer
Answer: A. Variable universal life adds owner-directed subaccounts to universal life's flexible premiums. Indexed universal life also has flexible premiums, but it credits interest linked to a market index rather than investing the cash value in subaccounts.
Source: Texas content outline I.B.3; Texas Department of Insurance: Life insurance guide
In a traditional (fixed) whole life policy, who bears the investment risk on the cash value?
1. A.The beneficiary
2. B.The state guaranty association
3. C.The insurer
4. D.The policyowner
Show answer
Answer: C. Fixed whole life cash values are guaranteed and backed by the insurer's general account, so the insurer carries the investment risk. In variable products the cash value sits in separate-account subaccounts and the policyowner carries the risk. A guaranty association only steps in if an insurer becomes insolvent.
Source: Texas content outline I.A and I.B
In an indexed universal life policy, a cap rate:
1. A.Sets the minimum interest the policy will be credited.
2. B.Limits the maximum interest credited for a period, even if the index gains more.
3. C.Is the highest death benefit the insurer will pay.
4. D.Is the percentage of each premium paid to the agent as commission.
Show answer
Answer: B. Indexed products credit interest based on a market index, but the insurer limits the upside with a cap (and sometimes a participation rate) in return for downside protection, usually a 0% floor. The floor, not the cap, is the minimum. The SEC describes the same cap mechanism for indexed annuities.
Source: Texas content outline I.B.5; SEC Investor.gov: Annuities (caps on indexed products)
Interest-sensitive (current assumption) whole life differs from ordinary whole life mainly because:
1. A.Its premium or cash value growth can change with the insurer's current interest and mortality assumptions, subject to guarantees.
2. B.It is registered with the SEC as a security.
3. C.Its death benefit decreases each year.
4. D.It has no cash value.
Show answer
Answer: A. Interest-sensitive whole life keeps a fixed death benefit, but the insurer credits cash value at current rates (with a guaranteed minimum) and may adjust the premium based on current assumptions. It is not a variable product, so it is not a registered security.
Source: Texas content outline I.B.4
A homeowner wants life insurance whose death benefit shrinks along with the mortgage balance. Which policy fits best?
1. A.Survivorship life
2. B.Decreasing term
3. C.Level term
4. D.Return of premium term
Show answer
Answer: B. Decreasing term reduces the death benefit over the term, which matches a loan balance that is being paid down. The premium usually stays level while the coverage shrinks.
Source: Texas content outline I.C.7.b
Which statement describes annually renewable term (ART)?
1. A.The premium stays level for 20 years.
2. B.It can only be bought by people over age 65.
3. C.It builds cash value that can be borrowed.
4. D.The premium rises each year with the insured's age, and coverage renews without proof of good health.
Show answer
Answer: D. ART is one-year term that renews each year without evidence of insurability, at a premium based on the insured's new age, so the premium goes up every year. Term life has no cash value.
Source: Texas content outline I.C.7.d; Texas Department of Insurance: Life insurance guide
Return of premium term life insurance:
1. A.Refunds the premiums if the insured dies during the term.
2. B.Converts automatically to whole life at the end of the term.
3. C.Costs less than level term for the same face amount.
4. D.Refunds premiums, as defined in the policy, if the insured outlives the term, and costs more than level term.
Show answer
Answer: D. If the insured is still alive when the term ends, the policy returns premiums as the contract defines them. That refund feature makes it more expensive than plain level term. If the insured dies during the term, the beneficiary receives the death benefit, not a premium refund.
Source: Texas content outline I.C.7.c
When a level term policy is renewed at the end of its term under a renewable provision:
1. A.The face amount doubles automatically.
2. B.The insured must pass a new medical exam.
3. C.The premium stays the same as the original premium.
4. D.No proof of insurability is needed, but the new premium is based on the insured's age at renewal.
Show answer
Answer: D. Renewability lets the owner extend coverage regardless of health and without a medical exam. Premiums stay level during a term but go up at renewal because the new premium is based on the insured's age at that time.
Source: Texas content outline I.C.8.a; Texas Department of Insurance: Life insurance guide
When a term policy is converted to whole life on an attained-age basis:
1. A.The new premium is based on the insured's age at conversion, and no proof of insurability is required.
2. B.The insured must take a medical exam.
3. C.The new premium is based on the insured's age when the term policy was issued, with no extra cost.
4. D.Conversion is only allowed in the first 30 days.
Show answer
Answer: A. The conversion privilege lets the owner switch to permanent coverage without a medical exam or health questions. With attained-age conversion the premium reflects the insured's current age, so it is higher. Insurers usually allow conversion only up to a set age, often 65.
Source: Texas content outline I.C.8; Texas Department of Insurance: Life insurance guide
During the accumulation period of a deferred annuity:
1. A.The annuitant receives regular income payments.
2. B.Premiums are paid in and earnings grow tax-deferred.
3. C.The contract can no longer be surrendered.
4. D.The insurer pays the death benefit.
Show answer
Answer: B. The accumulation period is when money goes in and grows tax-deferred. Income payments come later, in the payout (annuity) period. A deferred annuity can usually be surrendered, though surrender charges and taxes may apply.
Source: Texas content outline I.D.5; SEC Investor.gov: Annuities
Which describes an immediate annuity?
1. A.It has a long accumulation period before payments begin.
2. B.It is bought with a single payment and typically starts income payments within one year.
3. C.It is funded with flexible premiums over many years.
4. D.It can never provide lifetime income.
Show answer
Answer: B. The SEC describes an immediate annuity as one bought with a single payment that typically starts income payments within one year of purchase. Flexible premiums and a long accumulation period describe a deferred annuity.
Source: Texas content outline I.D.1–2; SEC Investor.gov: Annuities
Which annuity payout option gives the largest periodic payment for the same amount of money, but stops at the annuitant's death with nothing paid to a beneficiary?
1. A.Installment refund
2. B.Life with 10-year period certain
3. C.Life only (straight life)
4. D.Joint and survivor
Show answer
Answer: C. Life only pays for as long as the annuitant lives and nothing after, so the insurer can pay the most per period. Period-certain, refund and joint-and-survivor options promise payments beyond one death, which lowers each payment.
Source: Texas content outline I.D.6
A married couple wants a single policy that pays after both of them have died, to help their heirs pay estate costs. Which fits best?
1. A.Survivorship life (second-to-die)
2. B.Decreasing term
3. C.Joint life (first-to-die)
4. D.Group life
Show answer
Answer: A. Survivorship life covers two lives and pays only at the second death, when estate costs usually come due. Joint life pays at the first death, which suits a different need, such as replacing a business partner or a spouse's income.
Source: Texas content outline I.E.1–2

Where these questions come from: Texas content outline (Pearson VUE #124401, effective 1 Sep 2026), Life and Health general knowledge, section I: Types of Policies — 15 of 100 scored questions. See how we write questions.