Life Insurance Basics & Risk Concepts: TX-LH practice questions

Life Insurance Basics & Risk Concepts TX-LH-01-002

Mr. Chen wishes to purchase a life insurance policy on his neighbor, Mr. Davis, whom he admires greatly but has no financial relationship with. Mr. Davis does not know about the plan and has not consented to it. Mr. Chen plans to name himself as owner and beneficiary. Under Texas insurance law, which of the following statements regarding insurable interest is TRUE?

Mr. Chen must have an insurable interest in Mr. Davis's life at the time of the policy's inception for the policy to be valid. Insurable interest is only required at the time of the insured's death, not at policy inception. Mr. Chen has an insurable interest because he admires Mr. Davis, fulfilling the emotional connection requirement. Mr. Chen may buy the policy without Mr. Davis's knowledge, because whoever pays the premiums automatically has an insurable interest.

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The answer is A: Mr. Chen must have an insurable interest in Mr. Davis's life at the time of the policy's inception for the policy to be valid.

For a policy to be valid, the policyowner must have an insurable interest in the life of the insured when the policy is issued (inception). Insurable interest usually rests on a family, financial or legal relationship; admiration alone is not enough, and paying the premiums does not create one. Texas does let an adult consent in writing to a third party buying a policy on his life and naming any person as owner or beneficiary (Insurance Code §1103.056), and a person designated that way has an insurable interest (§1103.053). Mr. Davis has not consented, so Mr. Chen has no insurable interest and the policy would not be valid.

Source: Insurance Code §1103.056 Insurance Code §1103.053

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Life Insurance Basics & Risk Concepts TX-LH-01-065

Janet purchased a life insurance policy on her own life and named her best friend Mike as the primary beneficiary. Janet has no spouse or children. Mike has no financial relationship with Janet — they are simply close friends. Is the policy valid?

No, because Mike has no insurable interest in Janet's life. Yes, because Janet has insurable interest in her own life. No, because Texas requires beneficiaries to be blood relatives. Yes, but only if Mike is paying part of the premium.

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The answer is B: Yes, because Janet has insurable interest in her own life.

Insurable interest is required between the POLICYOWNER and the INSURED. Since Janet owns the policy on her own life, insurable interest exists, and as policyowner she may generally name anyone she wishes as beneficiary. Texas law also gives a beneficiary that an adult designates on a policy on his or her own life an insurable interest (Insurance Code §§1103.053-.054), apart from narrow exceptions such as a funeral business, so Mike needs no financial tie to Janet. Texas does not require beneficiaries to be blood relatives, and the beneficiary does not need to pay premiums.

Source: Insurance Code §1103.053

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Life Insurance Basics & Risk Concepts TX-LH-01-083

Acme Insurance pays its officers' salaries from premiums collected and pays dividends to shareholders. Policyholders pay premiums but do not receive dividends or have ownership rights. Acme is a:

Stock company Mutual company Lloyd's syndicate Fraternal benefit society

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The answer is A: Stock company

Stock companies are owned by shareholders. Profits, including dividends, go to shareholders, not policyholders. Policyholders have no ownership rights. Mutual companies, by contrast, are owned by policyholders, who receive dividends. Fraternal benefit societies are non-profits, and Lloyd's is a marketplace.

Reviewed in our October 2026 Texas fact-check.

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Life Insurance Basics & Risk Concepts TX-LH-01-090

John is the policyowner and insured of a life insurance policy on his own life. He paid for the policy himself, names his daughter as beneficiary, and pays all premiums. Three years later, he transfers ownership to his sister via an assignment. After the transfer, who has the authority to change the beneficiary?

The daughter, as current beneficiary. The insurer, since ownership was transferred. John, because he is the insured. John's sister, as the new policyowner.

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The answer is D: John's sister, as the new policyowner.

When ownership of a life insurance policy is assigned to another person, the new policyowner acquires all the rights of ownership, including the right to change beneficiaries (assuming revocable designation), borrow against cash value, surrender, and assign. John retains his role as the insured but no longer holds policyowner rights. The daughter (revocable beneficiary) has no policy rights, and the insurer does not unilaterally change beneficiaries.

Reviewed in our October 2026 Texas fact-check.

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Life Insurance Basics & Risk Concepts TX-LH-01-091

Marcus tells a prospective client, 'My company will pay your premium for the first year as a sign-up bonus,' even though no such promotion exists. He then signs the client up using his company's official application form and letterhead. The insurer discovers this misrepresentation. Even though Marcus had no actual authority to make this promise, the company is concerned because the client reasonably believed the promise based on the formal documents. The principle that potentially exposes the insurer to liability here is:

Implied authority Express authority Apparent authority Fiduciary authority

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The answer is C: Apparent authority

Apparent authority arises when the insurer's actions — providing official forms, letterhead, business cards, and holding the agent out as a representative — lead a third party to reasonably believe the agent has authority. Even when the agent lacks actual (express or implied) authority, the insurer may be held accountable. Express authority is what's in writing; implied is what's reasonably necessary for express duties. Fiduciary describes the agent's duty of trust, not a type of authority to bind the insurer.

Reviewed in our October 2026 Texas fact-check.

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