Insurance Planning and Risk Management
Risk management framework
Risk handling methods are avoidance, reduction, retention, and transfer. Insurance is a transfer mechanism. Candidates must identify pure versus speculative risk; only pure risk (loss or no loss) is insurable. Insurable risks also require a large number of similar exposure units, accidental loss, measurable loss, and no catastrophic concentration.
Life insurance
Term insurance is pure death protection; permanent policies (whole, universal, variable) add cash value and cost more. Key concepts: face amount, beneficiary designations, incontestability clause, suicide clause, grace period, reinstatement, and the free-look period. Underwriting classes (preferred, standard, substandard) affect premiums. The needs approach estimates coverage as income replacement plus debts, education, and final expenses minus existing resources; the human life value approach capitalizes future earnings.
Property and liability
Know coinsurance, deductibles, actual cash value versus replacement cost, and liability limits. Umbrella policies sit above auto and homeowners limits.
Health and disability
Disability definitions matter: own-occupation is broader than any-occupation. Elimination periods reduce premiums; benefit periods cap payouts.
Worked example
A client earns $80,000 and wants 70% income replacement for 20 years. Ignoring investment returns, the need is $56,000 × 20 = $1,120,000, reduced by existing assets and spousal income. This illustrates the needs approach; discounting future income would lower the figure.
Traps
Questions often confuse the insured with the owner or beneficiary, or test whether a policy feature is a rider versus a standard provision.