Idaho · Free practice
Free Idaho Life & Health insurance practice exam.
24 real practice questions with worked answers and explanations, drawn from the general-concepts and readiness pool that every Idaho L&H candidate is tested on. Reveal each answer as you go. No signup needed to practice.
These cover the national NAIC content shared across every state exam. The full Idaho course adds the Idaho-specific state-law question bank, full-length mocks at the real 70% passing line, and an AI tutor on every wrong answer.
Practice questions
1. Which of the following best describes a pure risk?
- A.A situation created by investing in a volatile stock market
- B.A situation where the outcome may be a loss, no loss, or a gain
- C.A situation involving gambling at a licensed casino
- D.A situation where the only possible outcomes are loss or no loss
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Correct answer: D. A situation where the only possible outcomes are loss or no loss
A pure risk has only two possible outcomes: loss or no loss. Because there is no chance of gain, pure risks are insurable under state insurance codes.
2. A business owner keeps a $5,000 deductible on her health plan to lower the premium. Which risk-handling method does this deductible represent?
- A.Risk retention, because the owner accepts financial responsibility for the first $5,000
- B.Risk reduction, because it lowers the probability of a health loss
- C.Risk transfer, because the insurer absorbs the first $5,000 of any claim
- D.Risk sharing, because the cost is spread among all employees on the plan
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Correct answer: A. Risk retention, because the owner accepts financial responsibility for the first $5,000
A deductible is risk retention. The owner keeps the first $5,000 of any loss rather than transferring it. A deductible does not lower the chance of loss and is therefore not risk reduction.
3. Carlos invests $20,000 in a startup. He asks his agent whether he can buy insurance on the investment because he might lose the entire amount. The agent should explain that this exposure is a speculative risk and therefore:
- A.Insurable, provided the potential loss exceeds $10,000
- B.Not insurable, because speculative risks are never covered under any state insurance code
- C.Insurable as a property floater policy
- D.Insurable only through a surplus lines carrier
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Correct answer: B. Not insurable, because speculative risks are never covered under any state insurance code
Speculative risks involve the possibility of gain, no change, or loss. No state insurance code permits a policy to cover speculative ventures; only pure risks are insurable.
4. An insurer pools 100,000 similar term-life policies to predict claims accurately. The statistical principle that explains why a larger, homogeneous pool produces more reliable loss predictions is the:
- A.Law of large numbers
- B.Principle of indemnity
- C.Principle of subrogation
- D.Doctrine of utmost good faith
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Correct answer: A. Law of large numbers
The law of large numbers states that as the number of similar, independent exposure units increases, actual loss experience converges toward the predicted loss, allowing actuarially sound premium setting.
5. Risk-retention groups that share losses among member businesses are authorized at the federal level under which statute?
- A.McCarran-Ferguson Act, 15 U.S.C. § 1011
- B.Liability Risk Retention Act of 1986, 15 U.S.C. §§ 3901-3906
- C.Nonadmitted and Reinsurance Reform Act of 2010, 15 U.S.C. § 8201
- D.Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1001
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Correct answer: B. Liability Risk Retention Act of 1986, 15 U.S.C. §§ 3901-3906
The Liability Risk Retention Act of 1986, 15 U.S.C. §§ 3901-3906, authorizes risk-retention groups that spread commercial liability losses among group members.
6. A hospital installs a sprinkler system to reduce fire damage. This action is best classified as which risk-handling method?
- A.Risk avoidance
- B.Risk transfer
- C.Risk retention
- D.Risk reduction
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Correct answer: D. Risk reduction
Installing a sprinkler system lowers the severity of a potential fire loss. Risk reduction takes steps to decrease the frequency or severity of a loss without eliminating the activity or transferring the financial risk.
7. Which characteristic distinguishes risk sharing from risk transfer via insurance?
- A.Risk sharing spreads loss among group members; risk transfer shifts it to a separate entity
- B.Risk sharing eliminates the exposure entirely; risk transfer retains a portion
- C.Risk sharing requires a premium paid to a licensed insurer; risk transfer does not
- D.Risk sharing is regulated only by federal law; risk transfer is regulated by state law
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Correct answer: A. Risk sharing spreads loss among group members; risk transfer shifts it to a separate entity
Risk sharing distributes financial loss among the members of a group (as in a risk-retention group). Risk transfer via insurance shifts the financial consequence to a separate entity, the insurer, through a premium-supported contract.
8. An underwriter reviews an application from an astronaut who makes one orbital flight per year. The underwriter declines, citing that the risk pool for orbital spaceflight is too small to generate credible loss statistics. Which insurable-risk requisite does this scenario most directly fail?
- A.The loss must be definite and measurable
- B.The loss must not be catastrophic to the insurer
- C.The loss must be statistically predictable via the law of large numbers
- D.The loss must be due to chance
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Correct answer: C. The loss must be statistically predictable via the law of large numbers
The law of large numbers requires a sufficiently large, homogeneous pool to produce reliable loss predictions. With only a handful of orbital flights per year, the exposure base is too small to generate credible actuarial data.
9. Under the majority-state rule for life insurance, insurable interest must exist:
- A.Only at the time the insured dies
- B.At both the time the policy is issued and at the time the insured dies
- C.Only at the time the policy is issued
- D.At any point during the policy's in-force period
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Correct answer: C. Only at the time the policy is issued
For life insurance, insurable interest must exist at the time the policy is issued. Once validly issued, the owner may later assign the policy to someone with no insurable interest. (NAIC Model 440, § 4.)
10. Danielle buys a life policy on her own life, then later assigns it to a stranger who has no financial relationship with her. The policy is:
- A.Voidable by the insurer because insurable interest did not exist at the original inception
- B.Valid only if the assignee pays a new premium equal to the death benefit
- C.Valid, because insurable interest existed at inception and later assignment to a stranger is lawful
- D.Void from the assignment date because the assignee lacks insurable interest
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Correct answer: C. Valid, because insurable interest existed at inception and later assignment to a stranger is lawful
A person always has insurable interest in their own life, satisfying the at-inception requirement. Once a life policy is validly issued, it may be assigned to a party with no insurable interest. (NAIC Model 440, § 4.)
11. A bank lends $80,000 to a borrower and purchases a life policy on the borrower to protect the loan. What is the maximum insurable interest the bank can demonstrate?
- A.The outstanding loan balance of $80,000
- B.An unlimited amount, because financial dependency creates full insurable interest
- C.No insurable interest exists because the bank is not a family member
- D.The total of all payments the borrower will make over the loan term
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Correct answer: A. The outstanding loan balance of $80,000
A creditor's insurable interest is limited to the amount of the outstanding debt. The bank's financial stake in the borrower's life is the $80,000 loan balance, not a larger amount.
12. Under the close-relative presumption, which relationship generally requires NO proof of financial dependency to establish insurable interest?
- A.A person and their first cousin
- B.A person and their spouse
- C.A person and their college roommate
- D.A person and their business partner of 10 years
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Correct answer: B. A person and their spouse
Most state codes expressly presume insurable interest between spouses, parents, children, and siblings without requiring proof of financial dependency. Cousins, roommates, and business partners generally must demonstrate a financial relationship.
13. Why does health insurance require insurable interest both at inception AND at the time of each claim, while life insurance requires it only at inception?
- A.Because NAIC Model 440 imposes a stricter standard on health than on life policies
- B.Because the close-relative presumption does not apply to health insurance
- C.Because health premiums are higher than life premiums
- D.Because health benefits reimburse ongoing losses rather than a lump-sum death benefit
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Correct answer: D. Because health benefits reimburse ongoing losses rather than a lump-sum death benefit
Health and disability policies pay benefits that reimburse a continuing loss at each claim event. Because each benefit payment must correspond to a current loss, insurable interest must exist both at inception and when the claim arises.
14. An employer buys a life policy on a key executive without obtaining the executive's written consent. Assuming the employer can demonstrate financial dependency, what is the most likely legal consequence under the majority-state rule?
- A.The policy is void because insurable interest cannot exist in a business context
- B.The policy is valid because insurable interest alone is sufficient
- C.The policy is valid for two years and then requires the executive's consent to continue
- D.The policy may be voidable because most states require the named insured's written consent when a third party buys the policy
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Correct answer: D. The policy may be voidable because most states require the named insured's written consent when a third party buys the policy
Consent and insurable interest are separate requirements. Even if the employer has insurable interest, most states also require the named insured's written consent when someone else purchases a policy on that person's life (NAIC Model 440, § 4(A)).
15. A life policy is issued on a stranger's life with no insurable interest and no consent. What is the legal status of this policy?
- A.Voidable at the insurer's election within two years of issuance
- B.Valid but subject to a reduced death benefit
- C.Valid until the incontestability period expires
- D.Void from inception, with no death benefit owed but premiums returned
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Correct answer: D. Void from inception, with no death benefit owed but premiums returned
A policy issued without insurable interest is void from inception, meaning it never legally existed. The insurer owes no death benefit but must return the premiums paid.
16. Marco and Luis are cousins. Marco wants to buy a $500,000 life policy on Luis, claiming emotional closeness. Luis signs a consent form. Which statement best describes whether insurable interest exists?
- A.Insurable interest exists because cousins fall within the close-relative presumption in all states
- B.Insurable interest exists automatically because Luis provided written consent
- C.Insurable interest exists because any family relationship satisfies the presumption
- D.Insurable interest likely does not exist because cousins typically must demonstrate financial dependency; consent does not substitute for insurable interest
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Correct answer: D. Insurable interest likely does not exist because cousins typically must demonstrate financial dependency; consent does not substitute for insurable interest
Extended relatives such as cousins generally fall outside the close-relative presumption and must show financial dependency. Consent is a separate requirement that protects the insured's autonomy; it does not create insurable interest.
17. In the formation of a life insurance contract, who makes the offer?
- A.The state, by approving the insurer's filed policy forms
- B.The insurer, by issuing a policy illustration
- C.The applicant, by submitting a completed application and the first premium
- D.The producer, by presenting coverage options to the applicant
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Correct answer: C. The applicant, by submitting a completed application and the first premium
In insurance contract formation, the applicant makes the offer by submitting a completed application, often with the first premium. The insurer accepts or rejects; it does not make the initial offer.
18. An applicant submits an application for a $250,000 whole life policy but the insurer issues a policy with a $200,000 face amount due to underwriting. Before the applicant signs the acceptance form, has a binding insurance contract been formed?
- A.Yes, because the insurer issued a policy in response to the application
- B.No, because the insurer issued a counteroffer on different terms, which the applicant must accept
- C.Yes, because partial acceptance is sufficient under insurance contract law
- D.No, because the applicant's consideration has not yet been received by the insurer
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Correct answer: B. No, because the insurer issued a counteroffer on different terms, which the applicant must accept
A policy issued on terms different from the application is a counteroffer, not an acceptance. A binding contract does not exist until the applicant accepts the insurer's counteroffer. (Restatement (Second) of Contracts § 50.)
19. What constitutes the insurer's consideration in a life insurance contract?
- A.The premium charged, set by the insurer's filed rate schedule
- B.The promise to pay covered losses as described in the policy
- C.The certificate of authority held by the insurer in each state
- D.The state-approved policy form that defines coverage terms
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Correct answer: B. The promise to pay covered losses as described in the policy
The insurer's consideration is its legally enforceable promise to pay covered losses. The applicant's consideration is the first premium plus the application statements. (NAIC Model 580.)
20. An applicant pays the first premium with the application and receives a conditional receipt. One week later, the applicant suffers a covered loss but the insurer has not yet completed underwriting. Coverage under the conditional receipt applies only if:
- A.The applicant passes a medical exam within 10 days of the loss
- B.The loss occurs during the underwriting review period
- C.The applicant was insurable as of the application date
- D.The insurer formally accepts the application within 30 days
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Correct answer: C. The applicant was insurable as of the application date
A conditional receipt provides interim coverage contingent on the applicant being insurable as of the application date. If the applicant would not have been insurable, the receipt provides no benefit regardless of when the loss occurs.
21. Which element of a valid contract requires that an insurer hold a valid certificate of authority in the state where the policy is issued?
- A.Legal purpose
- B.Competent parties
- C.Consideration
- D.Offer
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Correct answer: B. Competent parties
Competent parties requires both parties to have legal capacity. For an insurer, that includes holding a valid certificate of authority in the state of issuance, as required by NAIC Model Insurance Licensing Act (Model 218).
22. A policy is issued with the mutual intent of the applicant and agent to commit insurance fraud. This policy is best described as:
- A.Valid but subject to premium forfeiture upon discovery of fraud
- B.Enforceable until the incontestability period expires
- C.Voidable at the insurer's election once fraud is discovered
- D.Void ab initio, because the contract lacks a legal purpose
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Correct answer: D. Void ab initio, because the contract lacks a legal purpose
A contract formed with the intent to commit fraud violates the legal-purpose element and is void ab initio, meaning it never had legal existence. This differs from a voidable contract, which is valid until rescinded.
23. After a life insurance contract is formed, the insured stops paying premiums. Why is this NOT considered a breach of contract by the insured in the traditional contract-law sense?
- A.Because insurance contracts are unilateral: only the insurer makes a legally enforceable promise to pay
- B.Because the insurer waives the right to payment by accepting the application
- C.Because state grace-period statutes prohibit breach-of-contract claims for nonpayment
- D.Because the conditional receipt excuses future premium obligations
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Correct answer: A. Because insurance contracts are unilateral: only the insurer makes a legally enforceable promise to pay
Insurance contracts are unilateral. Only the insurer makes an enforceable promise to pay; the insured has no legal obligation to continue paying premiums. Nonpayment allows the insurer to cancel or lapse the policy but does not constitute breach.
24. Maria, age 17, applies for a life policy in a state where the age of majority is 18. The insurer issues the policy. Which of the following best describes the legal status of this contract?
- A.Fully valid, because life insurance contracts for minors are always enforceable
- B.Potentially voidable, because the competent-parties element may be deficient due to Maria's minority
- C.Void, because minors lack any legal capacity under insurance law
- D.Valid only if a parent co-signs the application as the policyholder
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Correct answer: B. Potentially voidable, because the competent-parties element may be deficient due to Maria's minority
Competent parties requires applicants to be of majority age. A contract with a minor may be voidable (not void) by the minor. Some states have specific statutes allowing minors above a threshold age to enter life insurance contracts; the outcome depends on state law.
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