Pennsylvania insurance exam federal tax practice questions
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Federal tax is 5% of the Pennsylvania Life exam (section 7.0, Federal Tax Considerations for Life Insurance) and 5% of the Accident and Health exam (section 10.0, Federal Tax Considerations for Health Insurance). [1] [2] The Life section lists qualified plans, withdrawals, rollovers versus transfers, IRAs (traditional versus Roth), 401(k) and 403(b) plans, and the taxation of personal life insurance premiums, dividends and settlements, plus modified endowment contracts. [1] The A&H section lists the taxation of individual and group health premiums and benefits, disability income, business disability insurance, medical expense, long-term care, and consumer-driven plans: HSAs, HRAs and FSAs. [2] This page covers the federal rules the IRS states, with 10 practice questions.
Life insurance proceeds
The IRS says life insurance proceeds received as a beneficiary "aren't includable in gross income," so they are not reported, but "any interest you receive is taxable." [3]
Retirement plans
- 2026 limits: the employee deferral limit for 401(k), 403(b) and 457 plans is $24,500, and the IRA contribution limit is $7,500. Catch-up contributions for people 50 and older are $8,000 for those workplace plans and $1,100 for IRAs. [4]
- Roth IRAs: "You cannot deduct contributions to a Roth IRA." If the requirements are met, "qualified distributions are tax-free." You can contribute after age 70 1/2 and leave amounts in a Roth IRA as long as you live. [5]
Disability income benefits
The IRS explains that if an employee paid the full cost of disability coverage with after-tax dollars, the benefits are not included in income. If the employer and employee both paid, only the part due to the employer's payments is income. Premiums paid through a cafeteria plan and not included in the employee's income are treated as employer paid, so the benefits are taxable. [3]
Health savings accounts and other accounts (IRS Publication 969)
- HSA contributions by an eligible individual, other than employer contributions, are deductible, and employer contributions are not included in income. [6]
- HSA distributions used for qualified medical expenses are not taxed. Distributions used for anything else are taxable and generally face an additional 20% tax, except after the owner is disabled, reaches 65 or dies. [6]
- An HRA must receive contributions from the employer only, and reimbursements for qualified medical expenses are not taxed. [6]
- A health FSA is usually funded through voluntary salary reductions. [6]
Practice questions
1. A beneficiary receives $250,000 of life insurance proceeds. How much is taxable income?
A. All of it
B. None of the proceeds; only any interest received
C. Half
D. Anything over $100,000
Answer: B. [3]
2. What is the 2026 IRA contribution limit for a 40 year old?
Answer: $7,500. [4]
3. What is the 2026 employee deferral limit for a 403(b) plan?
Answer: $24,500. [4]
4. Are Roth IRA contributions deductible?
Answer: No. [5]
5. A Roth IRA owner meets the requirements for a qualified distribution. How is it taxed?
Answer: It is tax free. [5]
6. An employee paid all disability income premiums with after-tax money and now receives benefits. Are they taxable?
Answer: No. [3]
7. The employer paid the whole disability premium and did not include it in the employee's income. Are the benefits taxable?
Answer: Yes. [3]
8. An eligible individual puts money into an HSA from her own pocket. Can she deduct it?
Answer: Yes. Contributions other than employer contributions are deductible on the eligible individual's return. [6]
9. A 50 year old takes an HSA distribution for a vacation. What happens?
Answer: It is taxable and generally faces an additional 20% tax. [6]
10. Who may fund an HRA?
Answer: The employer only. [6]
Study tips
- Life proceeds: generally not income; interest on them is.
- Disability benefits: taxed when the employer paid the premium, not when the employee paid with after-tax dollars.
- HSA: deductible going in, tax free coming out for medical costs, 20% extra tax otherwise before 65.
- Modified endowment contracts are also on the Life outline. [1]
Practice the full exams with our Pennsylvania life practice test or Pennsylvania accident and health practice test.
Prep Retention is independent and is not affiliated with PSI or the state.
Sources
Laws and exam documents quoted as of October 2026.
- PSI, Pennsylvania Life outline, Series 16-01 (effective 3/1/2026): https://proctor2.psionline.com/media/programs/PAINS/16-01xx.pdf
- PSI, Pennsylvania Accident and Health outline, Series 16-02 (effective 3/1/2026): https://proctor2.psionline.com/media/programs/PAINS/16-02xx.pdf
- IRS, Life Insurance and Disability Insurance Proceeds: https://www.irs.gov/faqs/interest-dividends-other-types-of-income/life-insurance-disability-insurance-proceeds
- IRS, 401(k) limit increases to $24,500 for 2026, IRA limit increases to $7,500 (IR-2025-111): https://www.irs.gov/newsroom/401k-limit-increases-to-24500-for-2026-ira-limit-increases-to-7500
- IRS, Roth IRAs: https://www.irs.gov/retirement-plans/roth-iras
- IRS Publication 969: https://www.irs.gov/publications/p969