Texas Life and Health Insurance Exam Prep 2026-200 Practice
Questions & Detailed Answers | Final Exam Questions with Verified
Solutions | 2025/2026 Update
SECTION 1: GENERAL INSURANCE CONCEPTS (Questions 1–20)
1. What is the definition of risk in insurance terms?
A) The certainty of financial loss
B) The chance of loss or uncertainty of financial loss
C) The transfer of liability to a third party
D) The elimination of all potential hazards
Correct Answer: B
Rationale: Risk is defined as the chance of loss or the uncertainty of financial loss. Insurance is a
mechanism for transferring pure risk from an individual or business to an insurer.
2. Which type of risk involves the possibility of loss but not gain?
A) Speculative risk
B) Pure risk
C) Investment risk
D) Market risk
Correct Answer: B
Rationale: Pure risk involves only the chance of loss or no loss (no opportunity for gain), such as the risk
of death, illness, or property damage. Pure risks are insurable.
,3. Which of the following is an example of a speculative risk?
A) A house fire
B) A car accident
C) Investing in the stock market
D) Premature death
Correct Answer: C
Rationale: Speculative risk involves the chance of loss or gain (e.g., gambling, investing). Speculative risks
are generally NOT insurable because they are voluntarily assumed.
4. What is adverse selection in insurance?
A) The insurer selecting which risks to insure
B) The tendency of higherrisk individuals to seek insurance more frequently than lowerrisk individuals
C) The process of selecting beneficiaries
D) The insurer's right to cancel a policy
Correct Answer: B
Rationale: Adverse selection occurs when individuals with a higherthanaverage risk of loss seek
insurance more frequently than lowerrisk individuals, potentially leading to higher claims than expected.
,5. What is the purpose of underwriting in insurance?
A) To sell as many policies as possible
B) To evaluate, select, classify, and price risks
C) To pay claims as quickly as possible
D) To invest insurance premiums
Correct Answer: B
Rationale: Underwriting is the process of selecting, classifying, and pricing risks to ensure a balanced
pool of insureds and prevent adverse selection.
6. The term "indemnity" in insurance means:
A) The insured must pay a deductible before coverage applies
B) The insurer agrees to restore the insured to their approximate financial position before the loss
C) The policy will pay regardless of other insurance
D) The insured can profit from an insurance claim
Correct Answer: B
Rationale: Indemnity means the insurer agrees to restore the insured to their approximate financial
position before the loss. The insured should not profit from an insurance claim.
7. Which of the following is a characteristic of an insurable risk?
A) The loss must be speculative
, B) The loss must be catastrophic
C) The loss must be measurable and definable
D) The loss must be certain to occur
Correct Answer: C
Rationale: An insurable risk must be measurable and definable so that the insurer can calculate the
probability of loss and determine an appropriate premium.
8. The principle of utmost good faith (uberrimae fidei) requires:
A) The insurer to act in good faith only
B) The insured to disclose all material facts relevant to the risk
C) Both the insurer and the insured to act in good faith
D) Neither party to disclose any information
Correct Answer: C
Rationale: The principle of utmost good faith requires both the insurer and the insured to act honestly
and disclose all material facts relevant to the risk. This is the foundation of all insurance contracts.
9. What is a unilateral contract?
A) A contract where only one party makes a legally enforceable promise
B) A contract where both parties make promises
C) A contract that can be canceled by either party
D) A contract that requires consideration from both parties
Questions & Detailed Answers | Final Exam Questions with Verified
Solutions | 2025/2026 Update
SECTION 1: GENERAL INSURANCE CONCEPTS (Questions 1–20)
1. What is the definition of risk in insurance terms?
A) The certainty of financial loss
B) The chance of loss or uncertainty of financial loss
C) The transfer of liability to a third party
D) The elimination of all potential hazards
Correct Answer: B
Rationale: Risk is defined as the chance of loss or the uncertainty of financial loss. Insurance is a
mechanism for transferring pure risk from an individual or business to an insurer.
2. Which type of risk involves the possibility of loss but not gain?
A) Speculative risk
B) Pure risk
C) Investment risk
D) Market risk
Correct Answer: B
Rationale: Pure risk involves only the chance of loss or no loss (no opportunity for gain), such as the risk
of death, illness, or property damage. Pure risks are insurable.
,3. Which of the following is an example of a speculative risk?
A) A house fire
B) A car accident
C) Investing in the stock market
D) Premature death
Correct Answer: C
Rationale: Speculative risk involves the chance of loss or gain (e.g., gambling, investing). Speculative risks
are generally NOT insurable because they are voluntarily assumed.
4. What is adverse selection in insurance?
A) The insurer selecting which risks to insure
B) The tendency of higherrisk individuals to seek insurance more frequently than lowerrisk individuals
C) The process of selecting beneficiaries
D) The insurer's right to cancel a policy
Correct Answer: B
Rationale: Adverse selection occurs when individuals with a higherthanaverage risk of loss seek
insurance more frequently than lowerrisk individuals, potentially leading to higher claims than expected.
,5. What is the purpose of underwriting in insurance?
A) To sell as many policies as possible
B) To evaluate, select, classify, and price risks
C) To pay claims as quickly as possible
D) To invest insurance premiums
Correct Answer: B
Rationale: Underwriting is the process of selecting, classifying, and pricing risks to ensure a balanced
pool of insureds and prevent adverse selection.
6. The term "indemnity" in insurance means:
A) The insured must pay a deductible before coverage applies
B) The insurer agrees to restore the insured to their approximate financial position before the loss
C) The policy will pay regardless of other insurance
D) The insured can profit from an insurance claim
Correct Answer: B
Rationale: Indemnity means the insurer agrees to restore the insured to their approximate financial
position before the loss. The insured should not profit from an insurance claim.
7. Which of the following is a characteristic of an insurable risk?
A) The loss must be speculative
, B) The loss must be catastrophic
C) The loss must be measurable and definable
D) The loss must be certain to occur
Correct Answer: C
Rationale: An insurable risk must be measurable and definable so that the insurer can calculate the
probability of loss and determine an appropriate premium.
8. The principle of utmost good faith (uberrimae fidei) requires:
A) The insurer to act in good faith only
B) The insured to disclose all material facts relevant to the risk
C) Both the insurer and the insured to act in good faith
D) Neither party to disclose any information
Correct Answer: C
Rationale: The principle of utmost good faith requires both the insurer and the insured to act honestly
and disclose all material facts relevant to the risk. This is the foundation of all insurance contracts.
9. What is a unilateral contract?
A) A contract where only one party makes a legally enforceable promise
B) A contract where both parties make promises
C) A contract that can be canceled by either party
D) A contract that requires consideration from both parties
