16 Texas State Law (TDI) Practice Questions & Answers

Every Texas State Law (TDI) practice question from the Insurance License Practice Test, with the correct answer and a short explanation.

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1. Which entity is responsible for regulating insurance and administering the licensing of insurance producers in Texas?
- A.The National Association of Insurance Commissioners (NAIC)
- B.The U.S. Department of the Treasury
- C.The Texas Department of Insurance (TDI)✓ Answer
- D.The Texas Guaranty Association
Insurance is regulated at the state level, and in Texas the Texas Department of Insurance (TDI) is the state agency charged with regulating the insurance industry and issuing producer licenses. The NAIC is a coordinating body of state regulators with no direct licensing authority.
Source: Texas Insurance Code Title 2, Subtitle A (Texas Department of Insurance); Chapter 4001 (agent licensing)Report a problem with this question
2. Who serves as the chief executive and administrative officer of the Texas Department of Insurance?
- A.The Commissioner of Insurance✓ Answer
- B.The Governor of Texas
- C.The Attorney General
- D.The State Insurance Board President
The Texas Department of Insurance is headed by the Commissioner of Insurance, who is the chief executive and administrative officer and exercises the regulatory powers granted by the Insurance Code. Although the Commissioner is appointed by the Governor, the Governor does not personally run the agency.
Source: Texas Insurance Code Chapter 31, Subchapter A (Commissioner of Insurance)Report a problem with this question
3. In Texas, before a licensed producer may transact business on behalf of a specific insurer, what must generally exist between the producer and that insurer?
- A.An appointment filed with TDI authorizing the producer to represent the insurer✓ Answer
- B.A surety bond posted by the insurer for the producer
- C.A power of attorney recorded with the county clerk
- D.A federal registration with the SEC
Holding a license permits a person to act as a producer, but to represent a particular insurer the producer must be appointed by that insurer, with the appointment filed with TDI. The appointment establishes the legal agency relationship authorizing the producer to sell that insurer's products.
Source: Texas Insurance Code Chapter 4001, Subchapter D (agent appointments)Report a problem with this question
4. Under Texas law, what is the term for taking, misappropriating, or withholding premium funds that belong to an insurer or an insured?
- A.Concurrent causation
- B.Rebating
- C.Twisting
- D.Misappropriation or conversion of fiduciary funds✓ Answer
Premiums a producer collects are fiduciary funds held in trust for the insurer or insured; taking or withholding them for one's own use is misappropriation or conversion, a prohibited practice that can result in license revocation. Twisting and rebating are different prohibited acts relating to policy replacement and inducements.
Source: Texas Insurance Code Chapter 4005 / Chapter 4001 (grounds for license denial or revocation — misappropriation of fiduciary funds)Report a problem with this question
5. A Texas producer induces a policyholder, through misrepresentation, to drop an existing life policy and buy a new one to the policyholder's detriment. This prohibited practice is known as:
- A.Redlining
- B.Coercion
- C.Twisting✓ Answer
- D.Defamation
Twisting is inducing a policyholder to lapse, forfeit, or surrender a policy and replace it based on misrepresentation or incomplete comparisons, harming the insured. It is classified as an unfair method of competition and deceptive act under the Texas Insurance Code.
Source: Texas Insurance Code Chapter 541 (unfair methods of competition and deceptive acts) — misrepresentation/twistingReport a problem with this question
6. Offering a customer something of value not stated in the policy — such as returning part of the premium or giving a gift — as an inducement to buy insurance is prohibited in Texas as:
- A.Subrogation
- B.Rebating✓ Answer
- C.Adverse selection
- D.Coinsurance
Rebating is offering an inducement not specified in the policy — money, gifts, or other valuable consideration — to persuade someone to buy. Texas prohibits it because it can distort fair competition and lead to unequal treatment of insureds in the same class.
Source: Texas Insurance Code Chapter 541 / Chapter 1806 (prohibited inducements / rebating)Report a problem with this question
7. Which of the following is an unfair claim settlement practice prohibited under the Texas Insurance Code?
- A.Paying a valid claim within the statutory deadline
- B.Failing to attempt in good faith to promptly and fairly settle a claim once liability is reasonably clear✓ Answer
- C.Investigating a claim before making payment
- D.Requesting a completed proof-of-loss form from the claimant
The Insurance Code makes it an unfair claim settlement practice to not attempt in good faith to effectuate a prompt, fair, and equitable settlement of a claim where the insurer's liability has become reasonably clear. Requesting proof of loss and reasonably investigating claims are legitimate parts of claims handling.
Source: Texas Insurance Code Chapter 541, Subchapter B (unfair settlement practices)Report a problem with this question
8. A Texas producer tells a prospect that a competing insurer is financially unsound and about to fail, when that is untrue. This unfair trade practice is best described as:
- A.Commingling
- B.Rebating
- C.Concealment
- D.Defamation of an insurer✓ Answer
Making or circulating a false, maliciously critical statement about the financial condition of an insurer is defamation, a prohibited unfair trade practice because it deceives consumers and unfairly injures a competitor. Commingling refers to mixing fiduciary funds with personal funds, a separate violation.
Source: Texas Insurance Code Chapter 541, Subchapter B (defamation as an unfair trade practice)Report a problem with this question
9. The primary purpose of the replacement rules that apply to Texas life insurance and annuity transactions is to:
- A.Ensure the policyholder receives full information to make an informed comparison before replacing a policy✓ Answer
- B.Prohibit any replacement of an existing life policy
- C.Require TDI to pre-approve every replacement sale
- D.Guarantee that the new policy always costs less than the old one
Replacement regulations require disclosures and notices so the applicant can compare the existing and proposed policies and understand what may be lost by replacing. The goal is informed decision-making and protection against unsuitable churning, not banning replacement or guaranteeing lower cost.
Source: 28 Texas Administrative Code Chapter 3, Subchapter A (replacement of life insurance and annuities)Report a problem with this question
10. When a producer engages in a transaction that replaces an existing life insurance policy in Texas, the producer is generally required to:
- A.Provide the applicant with the required replacement notice and submit replacement documentation to the insurer✓ Answer
- B.Obtain the Commissioner's signature on the application
- C.Wait one year before delivering the new policy
- D.Personally pay the surrender charges on the old policy
In a replacement, the producer must give the applicant the prescribed replacement notice and submit a statement and related documentation to the replacing insurer identifying the transaction as a replacement. This triggers the disclosure safeguards designed to protect the consumer.
Source: 28 Texas Administrative Code Chapter 3, Subchapter A (producer duties in replacement transactions)Report a problem with this question
11. What is the primary function of a Texas insurance guaranty association?
- A.To pay covered claims of policyholders when a member insurer becomes insolvent✓ Answer
- B.To license and appoint insurance producers
- C.To invest the state's pension funds
- D.To set the premium rates all insurers must charge
A guaranty association protects policyholders by paying covered claims (up to statutory limits) when a licensed member insurer becomes insolvent, funded by assessments on solvent member insurers. It does not set rates or license producers — those are TDI functions.
Source: Texas Insurance Code Chapter 462 (Property and Casualty Insurance Guaranty Act) and Chapter 463 (Life, Accident, Health, and Annuity Guaranty Association)Report a problem with this question
12. Which statement about how the Texas guaranty associations are funded is correct?
- A.They are funded by fees paid by insurance producers
- B.They are funded through assessments on the solvent insurers that are members of the association✓ Answer
- C.They are funded by a direct annual tax on policyholders
- D.They are funded from the state's general revenue budget
Guaranty associations raise money by assessing their solvent member insurers, which spreads the cost of an insolvency across the industry rather than onto taxpayers or individual consumers. Membership in the applicable association is a condition of being licensed to write that line in Texas.
Source: Texas Insurance Code Chapters 462 and 463 (guaranty association assessments and mandatory membership)Report a problem with this question
13. In Texas, providing false information on a license application or being convicted of a felony can result in TDI taking which action against a producer's license?
- A.A mandatory transfer of the license to another state
- B.Denial, suspension, or revocation of the license✓ Answer
- C.An automatic increase in the producer's commissions
- D.Conversion of the license into a corporate charter
The Insurance Code authorizes TDI to deny, suspend, or revoke a license for grounds such as material misrepresentation on the application, fraud, felony conviction, or violating insurance laws. This enforcement power protects the public by keeping untrustworthy individuals from acting as producers.
Source: Texas Insurance Code Chapter 4005 / Chapter 4001 (grounds for denial, suspension, or revocation of a license)Report a problem with this question
14. Under the Texas Prompt Payment of Claims Act (Texas Insurance Code Chapter 542), after receiving notice of a claim, how long does an insurer generally have to acknowledge receipt of the claim, commence investigation, and request the items it needs from the claimant?
- A.Not later than the 15th business day after receiving notice of the claim✓ Answer
- B.Immediately, within 24 hours of receiving notice of the claim
- C.Not later than the 90th calendar day after receiving notice of the claim
- D.Not later than the 60th calendar day after receiving notice of the claim
Texas Insurance Code Section 542.055 requires an insurer, not later than the 15th business day after receiving notice of a claim, to acknowledge receipt, begin any investigation, and request from the claimant the items, statements, and forms it reasonably believes will be required. This short statutory clock exists to force prompt claim handling and starts the chain of deadlines that can trigger 18% penalty interest if violated.
Source: Texas Insurance Code Sec. 542.055 (Prompt Payment of Claims Act, Ch. 542)Report a problem with this question
15. For most Texas resident insurance agent licenses, each two-year license period requires 24 hours of continuing education. How many of those 24 hours must specifically be in ethics?
- A.No ethics hours are required, only general credits
- B.3 hours of ethics✓ Answer
- C.8 hours of ethics
- D.1 hour of ethics
Under Texas Insurance Code Chapter 4004 and TDI rules, a licensee must complete 24 hours of continuing education per two-year license period, and at least 3 of those hours must be in ethics. Requiring dedicated ethics hours ensures agents stay current on conduct standards such as fiduciary duties and prohibited practices, not just product knowledge.
Source: Texas Insurance Code Ch. 4004; TDI continuing education rules (28 TAC Ch. 19)Report a problem with this question
16. A Texas insurance agent, to close a sale, offers to personally pay the prospect's first-month premium out of the agent's own commission — a benefit not stated in the policy. Under Texas insurance law, this practice is best described as:
- A.Illegal rebating, which is prohibited✓ Answer
- B.Twisting, but generally allowed
- C.Legal as long as it is disclosed verbally
- D.A permitted marketing discount
Texas Insurance Code Chapter 1806 prohibits rebating — inducing a person to buy insurance by offering any valuable consideration or inducement not specified in the policy, such as paying part of the premium out of the agent's commission. It is barred because it distorts fair competition and pricing; offering it is unlawful regardless of whether it is disclosed to the customer.
Source: Texas Insurance Code Ch. 1806 (Rebates and Illegal Inducements)Report a problem with this question

Practice questions cover general, uniform insurance concepts. State-specific laws and limits vary — study your state's official exam outline before testing. Insurance info (NAIC) →

1. Which entity is responsible for regulating insurance and administering the licensing of insurance producers in Texas?

2. Who serves as the chief executive and administrative officer of the Texas Department of Insurance?

3. In Texas, before a licensed producer may transact business on behalf of a specific insurer, what must generally exist between the producer and that insurer?

4. Under Texas law, what is the term for taking, misappropriating, or withholding premium funds that belong to an insurer or an insured?

5. A Texas producer induces a policyholder, through misrepresentation, to drop an existing life policy and buy a new one to the policyholder's detriment. This prohibited practice is known as:

6. Offering a customer something of value not stated in the policy — such as returning part of the premium or giving a gift — as an inducement to buy insurance is prohibited in Texas as:

7. Which of the following is an unfair claim settlement practice prohibited under the Texas Insurance Code?

8. A Texas producer tells a prospect that a competing insurer is financially unsound and about to fail, when that is untrue. This unfair trade practice is best described as:

9. The primary purpose of the replacement rules that apply to Texas life insurance and annuity transactions is to:

10. When a producer engages in a transaction that replaces an existing life insurance policy in Texas, the producer is generally required to:

11. What is the primary function of a Texas insurance guaranty association?

12. Which statement about how the Texas guaranty associations are funded is correct?

13. In Texas, providing false information on a license application or being convicted of a felony can result in TDI taking which action against a producer's license?

14. Under the Texas Prompt Payment of Claims Act (Texas Insurance Code Chapter 542), after receiving notice of a claim, how long does an insurer generally have to acknowledge receipt of the claim, commence investigation, and request the items it needs from the claimant?

15. For most Texas resident insurance agent licenses, each two-year license period requires 24 hours of continuing education. How many of those 24 hours must specifically be in ethics?

16. A Texas insurance agent, to close a sale, offers to personally pay the prospect's first-month premium out of the agent's own commission — a benefit not stated in the policy. Under Texas insurance law, this practice is best described as: