Annuities on the Texas Life and Health Exam: Rules, Traps, and Practice Questions

Annuities trip up a lot of people on the Texas Life and Health exam. The ideas are not hard, but there are many look alike terms, and Texas adds its own rules on top of the national material.

This page covers what you need: how annuities work, the payout options, the Texas rules on free look, best interest, and training, how annuities are taxed, and 8 practice questions I wrote so you can test yourself.

The Texas rules come from the Texas Insurance Code, the Texas Administrative Code, and TDI. The tax rules come from the IRS. Links are at the bottom. I checked them in October 2026.

Where annuities show up on the exam

In the Pearson VUE outline, annuities sit inside Life Types of Policies, which is 15 questions. The outline lists single and flexible premium, immediate and deferred, fixed and variable, indexed, the accumulation and annuity periods, and payout options.

They come back in the Texas life only section too, under advertising, the buyer's guide, policy provisions, free look, and replacement. And annuity ideas show up in retirement and tax questions.

So you will not see a block of 20 annuity questions. You will see a handful spread around, and each one is an easy point if you know the vocabulary.

The basics in plain English

An annuity is a contract with an insurance company. You pay money in, and the insurer promises to pay money out, either for a set time or for life. Life insurance protects against dying too soon. An annuity protects against living too long and running out of money.

Three parties. The owner buys the contract and controls it: withdrawals, beneficiary changes, surrender. The annuitant is the person whose life the payments are based on. The beneficiary gets any death benefit. The owner and annuitant are often the same person, but they do not have to be.

Two phases. The accumulation period is when money goes in and grows. The annuity period, also called the payout phase, is when income comes out. Converting the value into a stream of payments is called annuitization, and it is generally irreversible.

When payments start. An immediate annuity starts paying soon after you buy it, usually within a year, and it is bought with a single premium. A deferred annuity pays out at a later date and can be funded with a single premium or flexible premiums over time.

How the money grows. A fixed annuity guarantees a minimum interest rate. A variable annuity puts money in subaccounts that work like mutual funds, so the value can go down. An indexed annuity credits interest based on a market index, usually with a guaranteed minimum, so it sits between the other two on risk.

One more point the exam likes: variable annuities are securities. They are regulated by the state insurance department and also by the SEC and FINRA, so selling them takes securities registration on top of your insurance license.

Payout options

Expect at least one question that describes a person's goal and asks which payout option fits. The trade off is always the same: the more guarantees you add, the smaller each payment gets.

Life only, also called straight life. The highest payment for one person, but payments stop at death, even if that is a month later. Nothing goes to heirs.

Life with period certain. Payments for life, but if the annuitant dies early, payments continue to a beneficiary for the rest of the guaranteed period, such as 10 or 20 years.

Refund life, either cash refund or installment refund. Payments for life, and if the annuitant dies before receiving at least what was paid in, the beneficiary gets the difference, either in a lump sum or in installments.

Joint and survivor. Payments continue as long as either of two people is alive. This is the usual answer for a married couple who both need the income.

Period certain and fixed amount. Payments for a set number of years, or a set dollar amount until the money runs out. These are not life contingent, so they do not protect against outliving your money.

Texas rules you need to know

Free look: 20 days. Texas law requires a fixed annuity to let the buyer cancel within at least 20 days after delivery and get back all premiums, including fees and charges. A variable or modified guaranteed annuity also gets at least 20 days, but the refund is the cash surrender value plus any fees and charges deducted.

The 15 day rule. If the buyer's guide and disclosure document were not provided at or before the application, a TDI rule requires a free look of at least 15 days. It runs at the same time as any other free look, so it does not add days on top of the 20.

Replacement: 30 days. When a new annuity replaces an existing policy or contract, the owner gets 30 days from delivery to return it for a full refund. The replacing insurer must notify the existing insurer no later than the fifth business day after it receives the application showing a replacement.

Best interest. When an agent recommends an annuity, Texas requires the agent to act in the consumer's best interest without putting the agent's or insurer's financial interest first. The agent meets the standard by satisfying four obligations: care, disclosure, conflict of interest, and documentation.

Know what best interest is not. It is not a fiduciary duty. It does not require recommending the annuity with the lowest commission. It does not require ongoing monitoring of the client. On an exchange or replacement, the agent must consider surrender charges, lost benefits, new fees, whether the client will substantially benefit, and whether the client has had another annuity exchange or replacement in the past 60 months.

Records. Agents, agencies, and insurers keep the records behind a recommendation until the fifth anniversary of the completed transaction.

Training. Before selling annuities, a Texas agent must complete a one time 4 credit annuity training course, which TDI lists as Annuity Best Interest 4. The insurer has to verify it is done before letting the agent sell its annuities. After that, resident agents who sell annuities need 8 hours of annuity CE each two year license period, and those hours count toward the regular 24.

Guaranty association. If an insurer fails, the Texas Life and Health Insurance Guaranty Association covers up to $250,000 in present value of annuity benefits per life.

How annuities are taxed

You only need the basics here, and they repeat across life and annuity questions.

A nonqualified annuity is bought with after tax money. The premiums are not deductible, but the growth is tax deferred until money comes out.

Withdrawals from a nonqualified annuity before the annuity starting date come out of earnings first, and earnings are taxed as ordinary income. Only after the earnings are gone do you get your cost basis back tax free.

Once the contract is annuitized, each payment is part taxable earnings and part tax free return of what you paid in.

Taking money out before age 59 and a half can trigger a 10 percent additional tax on the taxable part, with some exceptions.

A 1035 exchange lets an owner move from one annuity to another without paying tax on the gain at that time. Tax free does not mean rule free: if an existing contract is being given up for a new one, the Texas replacement rules above still apply.

Practice questions

These are my own practice questions, not real exam items.

1. Who is the person whose life expectancy determines the annuity payments? A) Owner. B) Beneficiary. C) Annuitant. D) Insurer.

Answer: C. The owner controls the contract and the beneficiary receives the death benefit, but payments are measured on the annuitant's life.

2. Linda, 70, is single, has no heirs she wants to provide for, and wants the largest possible monthly income for life. Which payout option fits best? A) Life with 20 year period certain. B) Joint and survivor. C) Cash refund. D) Life only.

Answer: D. Every added guarantee lowers the payment. With no one to leave money to, life only gives her the most per month.

3. Which annuity can only be bought with a single premium? A) Flexible premium deferred. B) Single premium deferred. C) Immediate. D) Indexed.

Answer: C. An immediate annuity starts paying right away, so there is no accumulation period for more premiums.

4. Under Texas law, how long is the free look on a fixed annuity? A) At least 10 days. B) At least 20 days. C) At least 30 days. D) There is no free look on annuities.

Answer: B. At least 20 days after delivery, with a refund of all premiums including fees and charges. 30 days is the replacement number.

5. Which statement about the Texas best interest standard is true? A) It creates a fiduciary duty. B) The agent must recommend the lowest commission product. C) The agent must meet care, disclosure, conflict of interest, and documentation obligations. D) The agent must monitor the client's finances every year.

Answer: C. The other three are things the statute specifically says best interest does not require.

6. Before an agent sells annuities in Texas, what training is required? A) None beyond the license. B) A one time 4 credit annuity training course. C) 8 hours of annuity training every year. D) A securities license.

Answer: B. The one time 4 credit course comes first. The 8 hours of annuity CE is per two year license period after that. A securities license is only needed for variable products.

7. Ray, 52, withdraws $10,000 from a nonqualified deferred annuity that has $15,000 of gain. How is the withdrawal treated? A) Tax free return of premium. B) Taxable as ordinary income, and possibly subject to a 10 percent additional tax. C) Taxed as a capital gain. D) Half taxable, half tax free.

Answer: B. Withdrawals come from earnings first, and he is under 59 and a half.

8. A new annuity will replace a client's existing annuity. How long does the client have to return the new contract for a full refund? A) 10 days. B) 15 days. C) 20 days. D) 30 days.

Answer: D. Replacements get 30 days from delivery.

Traps to watch for

Owner versus annuitant. If a question names two different people, payments are measured on the annuitant, and control belongs to the owner.

Immediate means single premium. Flexible premium annuities are always deferred.

Life only is not a bad choice. It is the right answer when someone wants the most income and has no one to leave money to.

Free look numbers. 20 days for an annuity in Texas, 15 days when the buyer's guide and disclosure came late (running at the same time), and 30 days for a replacement.

Training versus CE. 4 credits once to start selling. 8 hours each license period after that, inside your 24.

Practice annuity questions with a timer

Take the free timed practice test at getlicensedtx.com/diagnostic. It is free, needs no card, and shows you whether life products and policy provisions are where you lose points.

GetLicensedTX has 1,000+ Pearson VUE style practice questions, weak area drills, the Full Exam Simulator (145 questions, timed), and the AI Study Tutor to walk you through any annuity question you miss. Start 3 days free, then $12.99 a month. See getlicensedtx.com/pricing.

For every Texas number on one page, including the life and health free look periods, use getlicensedtx.com/articles/texas-life-health-exam-cheat-sheet.