CFP Exam -- FP512 UPDATED ACTUAL
Questions and CORRECT Answers
Insurance - CORRECT 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
Risk - CORRECT 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
Peril - CORRECT ANSWER The cause of a financial loss
Hazards - CORRECT 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)
Deductible - CORRECT 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
Exclusions - CORRECT ANSWER Perils that are not covered in a policy (ex. War,
Earthquake, Flood)
Riders/Endorsements - CORRECT 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
Classification of Risks - CORRECT 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)
Risk Management - CORRECT 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
Risk Management Process - CORRECT 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
Risk Management Methods - CORRECT 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)
Insurable Risk (4 Elements) - CORRECT 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
Adverse Selection - CORRECT 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
Social Insurance - CORRECT 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
Public Insurance - CORRECT 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)
Private Insurance - CORRECT ANSWER * Marketed by private companies
* Examples: Life Insurance, Health Insurance, Disability Insurance, LTC Insurance, Property
Insurance, Liability Insurance
Questions and CORRECT Answers
Insurance - CORRECT 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
Risk - CORRECT 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
Peril - CORRECT ANSWER The cause of a financial loss
Hazards - CORRECT 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)
Deductible - CORRECT 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
Exclusions - CORRECT ANSWER Perils that are not covered in a policy (ex. War,
Earthquake, Flood)
Riders/Endorsements - CORRECT 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
Classification of Risks - CORRECT 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)
Risk Management - CORRECT 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
Risk Management Process - CORRECT 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
Risk Management Methods - CORRECT 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)
Insurable Risk (4 Elements) - CORRECT 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
Adverse Selection - CORRECT 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
Social Insurance - CORRECT 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
Public Insurance - CORRECT 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)
Private Insurance - CORRECT ANSWER * Marketed by private companies
* Examples: Life Insurance, Health Insurance, Disability Insurance, LTC Insurance, Property
Insurance, Liability Insurance
