Module 2: Risk Management and Insurance Planning
What Module 2 tests
Module 2 focuses on identifying and managing personal risks through insurance and risk-control techniques. It tests life, health, disability, long-term care, property, liability, and business insurance, plus policy provisions, underwriting, beneficiaries, and needs analysis.
Core rules
- Follow the risk process: identify, measure, choose retention/avoidance/reduction/transfer, implement, review.
- Insure large, low-probability losses; retain small, predictable ones. Insurance is for protection, not usually for investment.
- Match the policy to the exposure: term life for temporary income needs, permanent life only when a lasting need or estate liquidity justifies cost; disability defines occupation and benefit period; liability limits should reflect assets and legal risk.
- Check deductibles, exclusions, waiting periods, coordination of benefits, contestability, and beneficiary designations.
Worked example
A client earns $80,000, has a $250,000 mortgage, two children aged 8 and 11, and $150,000 in savings and group life. The planner estimates $500,000 for income replacement, $200,000 for education, and $250,000 for debt, totaling $950,000. Existing resources of $150,000 leave an $800,000 gap. Term life of $800,000 for 20 years covers the need at low cost; the planner also checks disability coverage because premature death and disability are different exposures.
Traps
Buying insurance as a savings vehicle without comparing costs; ignoring policy exclusions or occupation definitions; using actual cash value when replacement cost is needed; naming a minor as beneficiary without a guardian or trust; forgetting to review coverage after marriage, birth, or debt changes.