PSI LIFE INSURANCE LICENSING
EXAM 2026 | 200 PRACTICE
QUESTIONS WITH DETAILED
RATIONALES | VERIFIED ANSWERS |
LIFE AGENT TEST | A+ STUDY GUIDE
1. Which of the following best describes the principle of
"insurable interest" in life insurance?
A) The beneficiary must be a family member of the insured
B) The policyowner must suffer a financial or emotional loss
upon the death of the insured
C) The insured must be in good health at the time of application
D) The insurer must have a financial stake in the policy's
performance
Rationale: Insurable interest requires that the policyowner
would suffer a genuine financial or emotional hardship if the
insured dies. This prevents wagering on lives and ensures
insurance serves its protective purpose. It must exist at the time
of application, not necessarily at claim time.
Answer: B) The policyowner must suffer a financial or
emotional loss upon the death of the insured
2. Which life insurance policy provides coverage for a specified
period and pays a benefit only if the insured dies during that
term?
A) Whole Life
B) Universal Life
,C) Term Life
D) Variable Life
Rationale: Term life insurance provides pure death benefit
protection for a defined period (e.g., 10, 20, 30 years) with no
cash value accumulation. If the insured outlives the term, the
policy expires without value unless renewed or converted.
Answer: C) Term Life
3. What is the primary purpose of the "free look" provision in a
life insurance policy?
A) To allow the insurer to investigate the application
B) To give the policyowner a period (typically 10-30 days) to
review the policy and cancel for a full refund
C) To permit the agent to make post-issue changes
D) To enable the beneficiary to contest the policy
Rationale: The free look provision protects consumers by
allowing them to examine the policy after delivery. If
unsatisfied, they may return it within the specified period for a
full premium refund, ensuring informed consent.
Answer: B) To give the policyowner a period (typically 10-30
days) to review the policy and cancel for a full refund
4. Which rider allows a policyowner to purchase additional
insurance at specified future dates without evidence of
insurability?
A) Waiver of Premium Rider
B) Guaranteed Insurability Rider
C) Accidental Death Benefit Rider
D) Cost of Living Rider
Rationale: The Guaranteed Insurability Rider permits the
policyowner to buy additional coverage at predetermined ages
,or life events (marriage, birth of child) regardless of health
changes, protecting against future uninsurability.
Answer: B) Guaranteed Insurability Rider
5. In a life insurance policy, who has the right to change the
beneficiary designation?
A) The beneficiary
B) The insured, if they retain the right
C) The insurer
D) The state insurance department
Rationale: The policyowner (often the insured) controls
beneficiary designations unless they have irrevocably assigned
that right. Irrevocable beneficiaries must consent to changes.
Understanding ownership rights is critical for policy
administration.
Answer: B) The insured, if they retain the right
6. Which statement about "contestability" in life insurance is
TRUE?
A) The insurer can contest a claim at any time for any reason
B) After the contestability period (typically 2 years), the insurer
can only contest claims for non-payment of premiums
C) The contestability period allows the insurer to investigate
misrepresentations in the application
D) Contestability applies only to accidental death claims
Rationale: The contestability clause (usually 2 years) permits
the insurer to investigate and deny claims based on material
misrepresentations in the application. After this period, policies
become incontestable except for fraud or non-payment.
Answer: C) The contestability period allows the insurer to
investigate misrepresentations in the application
, 7. What is the tax treatment of life insurance death benefits
received by a beneficiary?
A) Fully taxable as ordinary income
B) Taxable only if the policy was owned by a corporation
C) Generally income-tax-free to the beneficiary
D) Subject to capital gains tax
Rationale: Life insurance death benefits are generally excluded
from the beneficiary's gross income under IRC Section 101(a).
Exceptions include transfers for value or policies with modified
endowment contract (MEC) status.
Answer: C) Generally income-tax-free to the beneficiary
8. Which type of life insurance policy builds cash value that the
policyowner can borrow against?
A) Term Life
B) Decreasing Term
C) Whole Life
D) Credit Life
Rationale: Permanent policies like Whole Life accumulate cash
value over time through premium payments and interest
credits. Policyowners may access this value via loans or
withdrawals, unlike term insurance which has no cash value.
Answer: C) Whole Life
9. The "suicide clause" in a life insurance policy typically:
A) Excludes coverage for suicide at any time
B) Denies claims for suicide within a specified period (e.g., 2
years) from issue
C) Requires additional premium for suicide coverage
D) Applies only to accidental death riders
EXAM 2026 | 200 PRACTICE
QUESTIONS WITH DETAILED
RATIONALES | VERIFIED ANSWERS |
LIFE AGENT TEST | A+ STUDY GUIDE
1. Which of the following best describes the principle of
"insurable interest" in life insurance?
A) The beneficiary must be a family member of the insured
B) The policyowner must suffer a financial or emotional loss
upon the death of the insured
C) The insured must be in good health at the time of application
D) The insurer must have a financial stake in the policy's
performance
Rationale: Insurable interest requires that the policyowner
would suffer a genuine financial or emotional hardship if the
insured dies. This prevents wagering on lives and ensures
insurance serves its protective purpose. It must exist at the time
of application, not necessarily at claim time.
Answer: B) The policyowner must suffer a financial or
emotional loss upon the death of the insured
2. Which life insurance policy provides coverage for a specified
period and pays a benefit only if the insured dies during that
term?
A) Whole Life
B) Universal Life
,C) Term Life
D) Variable Life
Rationale: Term life insurance provides pure death benefit
protection for a defined period (e.g., 10, 20, 30 years) with no
cash value accumulation. If the insured outlives the term, the
policy expires without value unless renewed or converted.
Answer: C) Term Life
3. What is the primary purpose of the "free look" provision in a
life insurance policy?
A) To allow the insurer to investigate the application
B) To give the policyowner a period (typically 10-30 days) to
review the policy and cancel for a full refund
C) To permit the agent to make post-issue changes
D) To enable the beneficiary to contest the policy
Rationale: The free look provision protects consumers by
allowing them to examine the policy after delivery. If
unsatisfied, they may return it within the specified period for a
full premium refund, ensuring informed consent.
Answer: B) To give the policyowner a period (typically 10-30
days) to review the policy and cancel for a full refund
4. Which rider allows a policyowner to purchase additional
insurance at specified future dates without evidence of
insurability?
A) Waiver of Premium Rider
B) Guaranteed Insurability Rider
C) Accidental Death Benefit Rider
D) Cost of Living Rider
Rationale: The Guaranteed Insurability Rider permits the
policyowner to buy additional coverage at predetermined ages
,or life events (marriage, birth of child) regardless of health
changes, protecting against future uninsurability.
Answer: B) Guaranteed Insurability Rider
5. In a life insurance policy, who has the right to change the
beneficiary designation?
A) The beneficiary
B) The insured, if they retain the right
C) The insurer
D) The state insurance department
Rationale: The policyowner (often the insured) controls
beneficiary designations unless they have irrevocably assigned
that right. Irrevocable beneficiaries must consent to changes.
Understanding ownership rights is critical for policy
administration.
Answer: B) The insured, if they retain the right
6. Which statement about "contestability" in life insurance is
TRUE?
A) The insurer can contest a claim at any time for any reason
B) After the contestability period (typically 2 years), the insurer
can only contest claims for non-payment of premiums
C) The contestability period allows the insurer to investigate
misrepresentations in the application
D) Contestability applies only to accidental death claims
Rationale: The contestability clause (usually 2 years) permits
the insurer to investigate and deny claims based on material
misrepresentations in the application. After this period, policies
become incontestable except for fraud or non-payment.
Answer: C) The contestability period allows the insurer to
investigate misrepresentations in the application
, 7. What is the tax treatment of life insurance death benefits
received by a beneficiary?
A) Fully taxable as ordinary income
B) Taxable only if the policy was owned by a corporation
C) Generally income-tax-free to the beneficiary
D) Subject to capital gains tax
Rationale: Life insurance death benefits are generally excluded
from the beneficiary's gross income under IRC Section 101(a).
Exceptions include transfers for value or policies with modified
endowment contract (MEC) status.
Answer: C) Generally income-tax-free to the beneficiary
8. Which type of life insurance policy builds cash value that the
policyowner can borrow against?
A) Term Life
B) Decreasing Term
C) Whole Life
D) Credit Life
Rationale: Permanent policies like Whole Life accumulate cash
value over time through premium payments and interest
credits. Policyowners may access this value via loans or
withdrawals, unlike term insurance which has no cash value.
Answer: C) Whole Life
9. The "suicide clause" in a life insurance policy typically:
A) Excludes coverage for suicide at any time
B) Denies claims for suicide within a specified period (e.g., 2
years) from issue
C) Requires additional premium for suicide coverage
D) Applies only to accidental death riders
