CFP FP512 Exam
Verified Exam Questions and Answers Latest update 2026/2027
Question:
Insurance -
Answer:
* A device used to manage risk by having a large pool
of people share in the financial losses suffered by members of the pool
* Risk is transferred to an insurance company
* The more group members, the greater the probability that an actual loss will equal the expected
loss
Question:
Risk -
Answer:
* A condition where there is a possibility of an adverse
deviation from the desired outcome
* Outcome is indeterminate
* At least two outcomes, and at least one of those is undesirable
Question:
Peril -
Answer:
The cause of a financial loss
Question:
Hazards -
Answer:
* Physical: Physical characteristics of the person or
property that increase the chance of loss (ex. high blood pressure)
* Moral: The chance of loss from dishonesty (ex. person intentionally causes a loss)
* Morale: Indifference to loss, which creates carelessness and increases the chance of a loss
occurring (ex. failing to lock car doors)
,Question:
Deductible -
Answer:
A stated amount of money the insured is required to
pay on a loss before the insurer will make any payments under the policy
Question:
Exclusions -
Answer:
Perils that are not covered in a policy (ex. War,
Earthquake, Flood)
Question:
Riders/Endorsements -
Answer:
* Used interchangably with one another
* Describe written additions to an insurance contract
* Provide a means to correct a policy in the case of a conflicting term
Question:
Classification of Risks -
Answer:
* Financial: Exposure to risk that may
cause financial loss
* Non-Financial: Exposure to a risk that does not cause financial loss (ex. pain + suffering)
* Static: Loss caused by factors other than change in the economy, always present (ex. natural
disaster)
* Dynamic: Result of the economy changing, and is generally not insurable (ex. recession,
inflation)
* Fundamental: Impacts a large group of people
* Speculative: Involves a gain or a loss, cannot be insured (ex. gambling)
Question:
Risk Management -
,Answer:
* A process of focusing on pure risks that can
be identified and evaluated
* Includes insurance planning because it manages both insurable and uninsurable risks
* Insurance should be justified on basis of a cost-benefit analysis and should only be used as a
last resort
Question:
Risk Management Process -
Answer:
1) Identify + Establish risk
management goals
2) Gather pertinent data to determine exposures
3) Analyze + Evaluate the information to identify exposures
4) Develop a risk management plan
5) Communicate the recommendations
6) Implement the recommendations
7) Monitor the recommendations
Question:
Risk Management Methods -
Answer:
* Risk Avoidance: Risk may be
avoided if the person refuses to engage in the activity that creates a risk (ex. refusing to fly)
* Risk Retention: No action is taken to avoid, transfer, or reduce the risk (ex. self-insurance,
deductibles, coinsurance)
* Risk Transfer: May be transferred, either through an individual or an insurance contract
* Risk Reduction: May be reduced through loss prevention methods and/or safety improvements
(ex. installing guard rails)
Question:
Insurable Risk (4 Elements) -
, Answer:
1) There must be a sufficiently large
and similar sample of individuals or events to make the losses reasonably predictable
2) The loss must be measurable and definite
3) The loss must be accidental
4) The loss cannot be catastrophic to society
Question:
Adverse Selection -
Answer:
* The likelihood that people with the highest
risk of loss are also the most likely to purchase insurance
* Also includes higher-risk persons seeking insurance coverage at the standard rates
* More common in insurance policies with premiums that increase with age
Question:
Social Insurance -
Answer:
* Mandatory insurance administered by the
government with benefits that are mandated by law
* The purpose is to protect people from large fundamental risks
* Examples: Social Security, Medicare, Workers' Compensation, Medicaid
Question:
Public Insurance -
Answer:
* Seeks to enhance public trust in financial
institutions
* Usually mandatory and administered by the government or quasi-governmental institutions
* Examples: Federal Deposit Insurance Corporation (FDIC), Pension Benefit Guaranty
Corporation (PBGC), Securities Investor Protection Corporation (SIPC)
Verified Exam Questions and Answers Latest update 2026/2027
Question:
Insurance -
Answer:
* A device used to manage risk by having a large pool
of people share in the financial losses suffered by members of the pool
* Risk is transferred to an insurance company
* The more group members, the greater the probability that an actual loss will equal the expected
loss
Question:
Risk -
Answer:
* A condition where there is a possibility of an adverse
deviation from the desired outcome
* Outcome is indeterminate
* At least two outcomes, and at least one of those is undesirable
Question:
Peril -
Answer:
The cause of a financial loss
Question:
Hazards -
Answer:
* Physical: Physical characteristics of the person or
property that increase the chance of loss (ex. high blood pressure)
* Moral: The chance of loss from dishonesty (ex. person intentionally causes a loss)
* Morale: Indifference to loss, which creates carelessness and increases the chance of a loss
occurring (ex. failing to lock car doors)
,Question:
Deductible -
Answer:
A stated amount of money the insured is required to
pay on a loss before the insurer will make any payments under the policy
Question:
Exclusions -
Answer:
Perils that are not covered in a policy (ex. War,
Earthquake, Flood)
Question:
Riders/Endorsements -
Answer:
* Used interchangably with one another
* Describe written additions to an insurance contract
* Provide a means to correct a policy in the case of a conflicting term
Question:
Classification of Risks -
Answer:
* Financial: Exposure to risk that may
cause financial loss
* Non-Financial: Exposure to a risk that does not cause financial loss (ex. pain + suffering)
* Static: Loss caused by factors other than change in the economy, always present (ex. natural
disaster)
* Dynamic: Result of the economy changing, and is generally not insurable (ex. recession,
inflation)
* Fundamental: Impacts a large group of people
* Speculative: Involves a gain or a loss, cannot be insured (ex. gambling)
Question:
Risk Management -
,Answer:
* A process of focusing on pure risks that can
be identified and evaluated
* Includes insurance planning because it manages both insurable and uninsurable risks
* Insurance should be justified on basis of a cost-benefit analysis and should only be used as a
last resort
Question:
Risk Management Process -
Answer:
1) Identify + Establish risk
management goals
2) Gather pertinent data to determine exposures
3) Analyze + Evaluate the information to identify exposures
4) Develop a risk management plan
5) Communicate the recommendations
6) Implement the recommendations
7) Monitor the recommendations
Question:
Risk Management Methods -
Answer:
* Risk Avoidance: Risk may be
avoided if the person refuses to engage in the activity that creates a risk (ex. refusing to fly)
* Risk Retention: No action is taken to avoid, transfer, or reduce the risk (ex. self-insurance,
deductibles, coinsurance)
* Risk Transfer: May be transferred, either through an individual or an insurance contract
* Risk Reduction: May be reduced through loss prevention methods and/or safety improvements
(ex. installing guard rails)
Question:
Insurable Risk (4 Elements) -
, Answer:
1) There must be a sufficiently large
and similar sample of individuals or events to make the losses reasonably predictable
2) The loss must be measurable and definite
3) The loss must be accidental
4) The loss cannot be catastrophic to society
Question:
Adverse Selection -
Answer:
* The likelihood that people with the highest
risk of loss are also the most likely to purchase insurance
* Also includes higher-risk persons seeking insurance coverage at the standard rates
* More common in insurance policies with premiums that increase with age
Question:
Social Insurance -
Answer:
* Mandatory insurance administered by the
government with benefits that are mandated by law
* The purpose is to protect people from large fundamental risks
* Examples: Social Security, Medicare, Workers' Compensation, Medicaid
Question:
Public Insurance -
Answer:
* Seeks to enhance public trust in financial
institutions
* Usually mandatory and administered by the government or quasi-governmental institutions
* Examples: Federal Deposit Insurance Corporation (FDIC), Pension Benefit Guaranty
Corporation (PBGC), Securities Investor Protection Corporation (SIPC)
