Risk Management and Estate Planning: Insurance and Transfer Tools
What this domain tests
Risk Management and Estate Planning tests pure risk, insurance selection, needs analysis, and estate transfer tools. Expect items on life, disability, long-term care, and property-casualty coverage, plus wills, trusts, titling, beneficiary designations, and federal transfer tax.
Core rules and concepts
- Risk treatment: avoid, reduce, retain, transfer, or share. Insurance transfers pure risk; it does not eliminate speculative investment risk.
- Life insurance needs analysis compares capital needs (income replacement, debt, education) with existing resources. Term covers temporary needs; permanent policies build cash value.
- Disability policies differ by own-occupation versus any-occupation definition, elimination period, and benefit period.
- Estate planning: wills control probate assets; trusts can avoid probate and manage distributions; beneficiary designations and titling override wills.
- 2025 federal gift/estate basic exclusion is $13.99 million per person; annual exclusion is $19,000 per donee. Portability requires a timely estate tax return.
Worked example
A married couple has a $15 million estate. The first spouse dies and leaves everything to the survivor, so the unlimited marital deduction means no federal estate tax at that death. If portability is elected, the survivor's applicable exclusion becomes about $27.98 million, and no federal estate tax is due at the second death. If portability is not elected, only $13.99 million is available: $15 million − $13.99 million = $1.01 million taxable × 40% = $404,000.
Traps that cost marks
- Assuming a will controls IRAs or life insurance; beneficiary designations usually control.
- Missing the portability election deadline.
- Ignoring carryover basis on lifetime gifts versus step-up basis at death.
- Confusing the annual exclusion with the lifetime exemption.
- Buying insurance without matching the policy definition and elimination period to the risk.