Risk management and insurance planning
What the exam tests
Domain 4 tests risk identification, treatment and insurance design. You must be able to size life, health, disability and liability cover, compare policy structures, and explain indemnity, insurable interest and the limits of insurance as a financial tool.
Core rules
- Risk treatments: avoid, reduce, retain, transfer. Insurance transfers defined risks; it is not an investment default.
- Insurable interest and utmost good faith underpin the contract; non-disclosure can void a claim.
- Life needs analysis: income replacement, debts, education and final expenses, minus existing assets and cover = gap.
- Disability cover typically targets 60–70% of income; check the definition, waiting period, benefit period and offset clauses.
- Property and liability: deductibles and coinsurance share risk; umbrella liability sits above auto and home limits.
- Match policy term to need: term life for temporary obligations, permanent cover only for lifelong needs such as estate liquidity.
Worked example
A client needs 500,000 income replacement, 200,000 education, 300,000 mortgage repayment and 50,000 final expenses: total 1,050,000. Existing investments are 250,000 and existing life cover 200,000, leaving a 600,000 gap. A 20-year level term policy of 600,000 covers the period until the mortgage is repaid and the children finish education. Permanent cover would cost more and is not justified by the facts; the planner should document the need calculation and review it at each life event.
Traps
Buying insurance as a savings vehicle without comparing costs; ignoring inflation in the need; forgetting group cover and offsets; insuring the wrong person; leaving liability limits at minimum; confusing critical illness with disability.