Insurance and Risk Management
This domain tests risk identification and treatment, the principles that make a risk insurable, policy analysis, and needs-based sizing of life, disability, health, property, and liability coverage. Expect questions on exclusions, deductibles, coinsurance, insurable interest, and the difference between the human-life-value and needs approaches.
Core rules and concepts
- Risk treatment options are avoidance, reduction, retention, transfer, and sharing. Insurance transfers a defined pure risk; it is not a way to fund speculative risk.
- Insurable risks are typically pure, accidental, measurable, large enough to matter, and not catastrophic to the insurer. Insurable interest must exist at inception; indemnity restores the insured to the pre-loss position, not better.
- Utmost good faith requires accurate disclosure. Material misrepresentation can void a policy. Subrogation and contribution prevent double recovery.
- Life insurance needs approach: income replacement, debts, education, final expenses, and emergency reserve minus existing resources such as savings, group life, and survivor benefits. Human life value capitalizes the client's future earnings.
- Disability insurance: own-occupation is broader than any-occupation; elimination period is the waiting time; benefit period and riders matter. Health and property policies use deductibles, coinsurance, limits, and exclusions.
- Liability coverage should be reviewed for limits and umbrella need; personal liability is not capped by the value of the home.
- Review coverage after marriage, divorce, birth, job change, and major asset purchases.
Worked example
A client needs 50,000 of annual income replacement for 15 years, has 200,000 of debts, 150,000 of education funding, and 15,000 of final expenses. Total needs are 750,000 + 200,000 + 150,000 + 15,000 = 1,115,000. Existing resources are 300,000 of savings and 400,000 of group life, or 700,000. The gap is 415,000. Reasoning: the need is temporary and income-replacement based, so level term of about 20 years is a reasonable starting point; a cash-value policy may be considered only if there is a separate permanent need and the premium is sustainable. A present-value calculation would reduce the income-replacement figure, but the logic is unchanged.
Traps that cost marks
- Confusing human life value with the needs approach.
- Ignoring group coverage and survivor benefits.
- Not indexing income replacement for inflation.
- Buying permanent cash-value coverage for a purely temporary need.
- Missing exclusions, waiting periods, or coinsurance.
- Insuring property for market value rather than replacement cost.