New Mexico Life and Health Insurance Practice Exam
QUESTIONS AND CORRECT ANSWERS (VERIFIED ANSWERS)
PLUS RATIONALES 2025
Section 1: Basic Insurance Concepts & Principles (1–15)
Question 1
What is the primary purpose of life insurance?
A. To create savings
B. To pay medical bills
C. To provide financial protection to dependents after death
D. To avoid taxes
Answer: C. To provide financial protection to dependents after death
Explanation: Life insurance provides financial protection and income replacement for beneficiaries after
the insured's death.
Question 2
What does the term "insurable interest" mean?
A. A legitimate financial or emotional interest in the person being insured
B. A person who is interested in buying insurance
C. An interest in stocks and bonds
D. A life expectancy greater than 10 years
Answer: A. A legitimate financial or emotional interest in the person being insured
,Explanation: Insurable interest ensures the policyowner benefits financially or emotionally from the
insured's survival.
Question 3
A life insurance policy's consideration clause states:
A. The premium paid and the application are the consideration
B. That the insurer guarantees insurability
C. That the policy is renewable
D. That the insurer pays death claims
Answer: A. The premium paid and the application are the consideration
Explanation: Consideration is the exchange of value – the insured's premiums and representations in the
application.
Question 4
What is insurance?
A. A government entitlement program
B. A method of spreading the result of financial loss among a large number of people
C. A savings account for medical expenses
D. An investment in the stock market
Answer: B. A method of spreading the result of financial loss among a large number of people
Explanation: Insurance pools risk among many policyholders so losses of a few are shared by many.
,Question 5
What is indemnity in insurance terms?
A. The right to sue the insurance company
B. The concept that insurance should restore the insured to the condition enjoyed before the loss
C. The amount of premium paid
D. The death benefit amount
Answer: B. The concept that insurance should restore the insured to the condition enjoyed before the
loss
Explanation: Indemnity means the insured should not profit from a loss.
Question 6
Which of the following correctly defines risk in insurance?
A. The certainty of financial gain
B. The uncertainty of financial loss
C. The guaranteed payment of benefits
D. The premium amount
Answer: B. The uncertainty of financial loss
Explanation: Risk is the uncertainty or chance of financial loss occurring.
Question 7
Which type of risk involves only a chance of loss with no possibility of gain?
A. Speculative risk
, B. Pure risk
C. Investment risk
D. Market risk
Answer: B. Pure risk
Explanation: Pure risk involves only the chance of loss with no possibility of gain (death, illness, property
damage). Only pure risks are insurable.
Question 8
Which type of risk involves both uncertainty of loss AND gain?
A. Pure risk
B. Speculative risk
C. Insurable risk
D. Fundamental risk
Answer: B. Speculative risk
Explanation: Speculative risk involves both possibility of loss and gain (gambling, investing). These are
generally not insurable.
Question 9
Which of the following helps insurance companies reduce their risk by sharing medical information?
A. PMI
B. CPI
C. MIB
D. PLMA
QUESTIONS AND CORRECT ANSWERS (VERIFIED ANSWERS)
PLUS RATIONALES 2025
Section 1: Basic Insurance Concepts & Principles (1–15)
Question 1
What is the primary purpose of life insurance?
A. To create savings
B. To pay medical bills
C. To provide financial protection to dependents after death
D. To avoid taxes
Answer: C. To provide financial protection to dependents after death
Explanation: Life insurance provides financial protection and income replacement for beneficiaries after
the insured's death.
Question 2
What does the term "insurable interest" mean?
A. A legitimate financial or emotional interest in the person being insured
B. A person who is interested in buying insurance
C. An interest in stocks and bonds
D. A life expectancy greater than 10 years
Answer: A. A legitimate financial or emotional interest in the person being insured
,Explanation: Insurable interest ensures the policyowner benefits financially or emotionally from the
insured's survival.
Question 3
A life insurance policy's consideration clause states:
A. The premium paid and the application are the consideration
B. That the insurer guarantees insurability
C. That the policy is renewable
D. That the insurer pays death claims
Answer: A. The premium paid and the application are the consideration
Explanation: Consideration is the exchange of value – the insured's premiums and representations in the
application.
Question 4
What is insurance?
A. A government entitlement program
B. A method of spreading the result of financial loss among a large number of people
C. A savings account for medical expenses
D. An investment in the stock market
Answer: B. A method of spreading the result of financial loss among a large number of people
Explanation: Insurance pools risk among many policyholders so losses of a few are shared by many.
,Question 5
What is indemnity in insurance terms?
A. The right to sue the insurance company
B. The concept that insurance should restore the insured to the condition enjoyed before the loss
C. The amount of premium paid
D. The death benefit amount
Answer: B. The concept that insurance should restore the insured to the condition enjoyed before the
loss
Explanation: Indemnity means the insured should not profit from a loss.
Question 6
Which of the following correctly defines risk in insurance?
A. The certainty of financial gain
B. The uncertainty of financial loss
C. The guaranteed payment of benefits
D. The premium amount
Answer: B. The uncertainty of financial loss
Explanation: Risk is the uncertainty or chance of financial loss occurring.
Question 7
Which type of risk involves only a chance of loss with no possibility of gain?
A. Speculative risk
, B. Pure risk
C. Investment risk
D. Market risk
Answer: B. Pure risk
Explanation: Pure risk involves only the chance of loss with no possibility of gain (death, illness, property
damage). Only pure risks are insurable.
Question 8
Which type of risk involves both uncertainty of loss AND gain?
A. Pure risk
B. Speculative risk
C. Insurable risk
D. Fundamental risk
Answer: B. Speculative risk
Explanation: Speculative risk involves both possibility of loss and gain (gambling, investing). These are
generally not insurable.
Question 9
Which of the following helps insurance companies reduce their risk by sharing medical information?
A. PMI
B. CPI
C. MIB
D. PLMA
