CFP Exam - Risk Management, Insurance, and Employee Benefits Planning with Complete Solutions 2023

CFP Exam - Risk Management, Insurance, and Employee Benefits Pl anning with Complete Solutions 2023 peril - CORRECT ANSWER cause of financial loss hazard - CORRECT ANSWER increases the probability that a loss will occur static risk - CORRECT ANSWER losses that are caused by factors other than a change in the economy, risks that are always present dynamic risk - CORRECT ANSWER the result of the economy changing; insurance does not cover these risks pure risk - CORRECT AN SWER A chance of loss or no loss, but no chance of gain; is insurable speculative risk - CORRECT ANSWER chance of both loss or gain and is not insurable (gambling) Risk Management Process - CORRECT ANSWER 1. determine the objectives of the risk managemen t plan 2. identify the risks 3. evaluate the identified risks and the probability of occurrence 4. determine alternatives for managing risks and select alternative risks 5. implement most appropriate alternative 6. evaluate and review periodically risk re tention - CORRECT ANSWER no action is taken to avoid, transfer, or reduce risk (self-insurance) an insurable risk has four elements: - CORRECT ANSWER 1. There must be a large and similar sample of individuals to make the losses predictable 2. loss must be measurable and indefinite 3. loss must be accidental 4. loss cannot be catastrophic to society Adverse selection - CORRECT ANSWER the likelihood that people with highest risk of loss are also most likely to buy insurance An enforceable contract contains - CORRECT ANSWER 1. offer and acceptance ( underwriting) 2. consideration (exchange of value) 3. legal object (must be a legal situation) 4. legal capacity (no minors or incompetents) 5. legal form (written usually, filed) Actual Cash Value (ACV) - CORRECT ANSWER Cost to replace property with new property of like kind and quality less depreciation. ACV = RCV - Depreciation Estoppel - CORRECT ANSWER A legal impediment to denying a fact or restoring a right that has been p reviously waived. personal contract - CORRECT ANSWER insurance is non -transferable (life insurance is exception) Contract of Indemnity - CORRECT ANSWER insured may recover from insurance company only up to actual financial loss (life insurance is excepti on) Subrogation - CORRECT ANSWER The process by which an insurer can, after it has paid a loss under the policy, recover the amount paid from any party (other than the insured) who caused the loss or is otherwise legally liable for the loss. disability w aiver of premium - CORRECT ANSWER this clause in an insurance policy waives the payment of the yearly premium if the policyholder should become disabled and continues the waiver until the policyholder returns to work Accidental Death Benefit Rider - CORRE CT ANSWER A life insurance policy rider providing for payment of an additional benefit when death occurs by accidental means. Guaranteed Insurability Rider - CORRECT ANSWER Optional rider that enables the policyowner to purchase additional amounts of cove rage at predetermined times without proof of insurability. Spendthrift Clause - CORRECT ANSWER A clause that prevents the debtors of a beneficiary from collecting the benefits before he/she receives them. Term Life Insurance - CORRECT ANSWER - Insurance that provides financial protection from losses resulting from a death during a definite period, or term. - Coverage ceases at end of term if not renewed - premium will increase annually unless set for a numb er of years (5 year renewable term) - no cash value or investment component - used for temporary life insurance need - provides large death benefit with low initial costs (good for young people)