Risk Management and Insurance Planning
The Risk Management Process
Risk management follows identify, measure, select a technique, implement, and monitor. Techniques are avoidance, reduction, retention, and transfer. Insurance is transfer. Candidates must know which risks are insurable: pure risks with measurable frequency and severity, not speculative investment risk. Understand the concept of retention levels (deductibles) and the trade-off between premium and deductible.
Life, Health, Disability, and Property
Know term versus permanent life insurance, the role of underwriting, and the purpose of insurance needs analysis (human life value and needs approaches). Understand disability insurance definitions: own-occupation versus any-occupation, elimination periods, and benefit periods. For property, know replacement cost versus actual cash value, coinsurance, and liability limits. Understand umbrella policies for excess liability.
Traps in Exam Questions
The biggest trap is recommending insurance as an investment when the client's need is pure protection; term coverage plus separate investing is often more efficient. Another trap confuses the insured, owner, and beneficiary roles. Watch for questions on the incontestability period, suicide clauses, and the tax treatment of death benefits (generally income-tax-free to beneficiaries). Also watch for disability policies where the definition, not the premium, determines real value.
Worked Example
A client earning $100,000 has employer group disability covering 60% of income but only on an any-occupation basis after 90 days. The planner identifies a gap: if the client cannot perform their own occupation but can work elsewhere, benefits may stop. The recommendation is an individual own-occupation policy to supplement, with the elimination period coordinated to the employer plan.
Rule of Thumb
Insure the large, low-probability losses; retain the small, high-probability ones through deductibles.