Texas Insurance Licensing EXAM PRACTICE TEST
QUESTIONS AND CORRECT ANSWERS (VERIFIED
ANSWERS) PLUS RATIONALES | INSTANT
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1. Which of the following best describes the principle of indemnity in insurance?
A. Insured can profit from a loss
B. Insured is restored to the same financial position as before the loss
C. Insured must pay a deductible
D. Insured can transfer risk to another party
Correct Answer: B. Indemnity ensures that the insured is restored to the same financial position
as before the loss without profiting from it.
2. What is the primary purpose of insurance?
A. To provide a guaranteed return
B. To transfer risk from an individual to an insurance company
C. To avoid paying taxes
D. To accumulate wealth
Correct Answer: B. Insurance transfers financial risk from the insured to the insurer in exchange
for a premium.
3. Which type of insurance protects against lawsuits resulting from injuries to others or their
property?
A. Life insurance
B. Health insurance
C. Liability insurance
D. Disability insurance
Correct Answer: C. Liability insurance covers claims or lawsuits when the insured causes injury or
property damage to others.
4. In Texas, who regulates the insurance industry?
A. Texas Department of Insurance (TDI)
B. Federal Trade Commission (FTC)
C. Securities and Exchange Commission (SEC)
,D. Federal Reserve
Correct Answer: A. The Texas Department of Insurance oversees licensing, compliance, and
regulation of insurance in Texas.
5. What does “insurable interest” mean?
A. The insured has a financial stake in the continued existence of the insured item or person
B. The insured can sell the policy for a profit
C. The insurer must pay claims without proof
D. The insured must pay a premium
Correct Answer: A. Insurable interest exists when the policyholder would suffer financially from
the loss of the insured property or life.
6. Which of the following is an example of a hazard?
A. A fire in a forest
B. Smoking in bed
C. Theft
D. Flooding
Correct Answer: B. Smoking in bed is a hazard because it increases the likelihood of a loss
occurring.
7. What is the difference between a peril and a hazard?
A. Peril is the cause of loss, hazard increases the chance of loss
B. Peril increases chance of loss, hazard is the loss itself
C. Peril and hazard are the same
D. Hazard is always natural, peril is man-made
Correct Answer: A. A peril is the cause of loss, while a hazard is a condition that increases the
likelihood of that loss.
8. Which of the following is a type of life insurance?
A. Whole life
B. Term life
C. Universal life
D. All of the above
Correct Answer: D. All of these are types of life insurance with different coverage terms and cash
value features.
9. In property insurance, what does the term “deductible” refer to?
A. The amount the insurer will pay before coverage begins
B. The amount the insured must pay out-of-pocket before the insurer pays the rest
C. The total premium paid
, D. The profit for the insurer
Correct Answer: B. The deductible is the portion of a loss that the insured must pay before the
insurance company covers the rest.
10. Which of the following describes a “moral hazard”?
A. A natural disaster like a hurricane
B. Dishonest tendencies of the insured increasing the likelihood of loss
C. Poor maintenance of property
D. Risk arising from physical conditions
Correct Answer: B. Moral hazard involves behavior by the insured that increases the chance of a
loss, such as fraud or carelessness.
11. Which of the following is true about “coinsurance” in property insurance?
A. It applies only to life insurance
B. It requires the insured to carry a minimum amount of insurance relative to property value
C. It reduces the deductible to zero
D. It guarantees full replacement cost
Correct Answer: B. Coinsurance ensures that the insured maintains adequate coverage relative
to the value of the property, or a penalty applies.
12. What is the main function of reinsurance?
A. To insure individuals who cannot get insurance
B. To allow insurers to share risk with other insurers
C. To increase deductibles
D. To reduce premiums for policyholders
Correct Answer: B. Reinsurance allows insurers to protect themselves by transferring a portion of
risk to another insurance company.
13. Which Texas law requires insurance companies to treat customers fairly and prohibits
unfair practices?
A. Texas Insurance Code
B. Texas Penal Code
C. Texas Health and Safety Code
D. Texas Labor Code
Correct Answer: A. The Texas Insurance Code regulates the insurance industry and protects
consumers against unfair practices.
14. Which type of health insurance pays a fixed amount for each day the insured is
hospitalized?
A. Indemnity health insurance
QUESTIONS AND CORRECT ANSWERS (VERIFIED
ANSWERS) PLUS RATIONALES | INSTANT
DOWNLOAD PDF
1. Which of the following best describes the principle of indemnity in insurance?
A. Insured can profit from a loss
B. Insured is restored to the same financial position as before the loss
C. Insured must pay a deductible
D. Insured can transfer risk to another party
Correct Answer: B. Indemnity ensures that the insured is restored to the same financial position
as before the loss without profiting from it.
2. What is the primary purpose of insurance?
A. To provide a guaranteed return
B. To transfer risk from an individual to an insurance company
C. To avoid paying taxes
D. To accumulate wealth
Correct Answer: B. Insurance transfers financial risk from the insured to the insurer in exchange
for a premium.
3. Which type of insurance protects against lawsuits resulting from injuries to others or their
property?
A. Life insurance
B. Health insurance
C. Liability insurance
D. Disability insurance
Correct Answer: C. Liability insurance covers claims or lawsuits when the insured causes injury or
property damage to others.
4. In Texas, who regulates the insurance industry?
A. Texas Department of Insurance (TDI)
B. Federal Trade Commission (FTC)
C. Securities and Exchange Commission (SEC)
,D. Federal Reserve
Correct Answer: A. The Texas Department of Insurance oversees licensing, compliance, and
regulation of insurance in Texas.
5. What does “insurable interest” mean?
A. The insured has a financial stake in the continued existence of the insured item or person
B. The insured can sell the policy for a profit
C. The insurer must pay claims without proof
D. The insured must pay a premium
Correct Answer: A. Insurable interest exists when the policyholder would suffer financially from
the loss of the insured property or life.
6. Which of the following is an example of a hazard?
A. A fire in a forest
B. Smoking in bed
C. Theft
D. Flooding
Correct Answer: B. Smoking in bed is a hazard because it increases the likelihood of a loss
occurring.
7. What is the difference between a peril and a hazard?
A. Peril is the cause of loss, hazard increases the chance of loss
B. Peril increases chance of loss, hazard is the loss itself
C. Peril and hazard are the same
D. Hazard is always natural, peril is man-made
Correct Answer: A. A peril is the cause of loss, while a hazard is a condition that increases the
likelihood of that loss.
8. Which of the following is a type of life insurance?
A. Whole life
B. Term life
C. Universal life
D. All of the above
Correct Answer: D. All of these are types of life insurance with different coverage terms and cash
value features.
9. In property insurance, what does the term “deductible” refer to?
A. The amount the insurer will pay before coverage begins
B. The amount the insured must pay out-of-pocket before the insurer pays the rest
C. The total premium paid
, D. The profit for the insurer
Correct Answer: B. The deductible is the portion of a loss that the insured must pay before the
insurance company covers the rest.
10. Which of the following describes a “moral hazard”?
A. A natural disaster like a hurricane
B. Dishonest tendencies of the insured increasing the likelihood of loss
C. Poor maintenance of property
D. Risk arising from physical conditions
Correct Answer: B. Moral hazard involves behavior by the insured that increases the chance of a
loss, such as fraud or carelessness.
11. Which of the following is true about “coinsurance” in property insurance?
A. It applies only to life insurance
B. It requires the insured to carry a minimum amount of insurance relative to property value
C. It reduces the deductible to zero
D. It guarantees full replacement cost
Correct Answer: B. Coinsurance ensures that the insured maintains adequate coverage relative
to the value of the property, or a penalty applies.
12. What is the main function of reinsurance?
A. To insure individuals who cannot get insurance
B. To allow insurers to share risk with other insurers
C. To increase deductibles
D. To reduce premiums for policyholders
Correct Answer: B. Reinsurance allows insurers to protect themselves by transferring a portion of
risk to another insurance company.
13. Which Texas law requires insurance companies to treat customers fairly and prohibits
unfair practices?
A. Texas Insurance Code
B. Texas Penal Code
C. Texas Health and Safety Code
D. Texas Labor Code
Correct Answer: A. The Texas Insurance Code regulates the insurance industry and protects
consumers against unfair practices.
14. Which type of health insurance pays a fixed amount for each day the insured is
hospitalized?
A. Indemnity health insurance
