Risk Management and Insurance Planning
Risk Management and Insurance Planning
This domain tests exposure identification, insurance needs analysis, and policy selection for life, disability, health, property, liability, and long-term care risks.
Core rules and concepts
- Risk handling techniques: avoid, reduce, retain, transfer, and share.
- Life insurance needs approach: income replacement, debts, education, final expenses, and emergency fund, minus existing resources and coverage.
- Human life value approach: present value of the client's future earnings consumed by dependents.
- Disability: compare own-occupation vs any-occupation definitions, elimination period, benefit period, and benefit amount.
- Property/liability: coordinate homeowners, auto, and umbrella limits; review deductibles and exclusions.
- Health and LTC: consider Medicare gaps, coinsurance, and benefit triggers.
- Annuities: mortality and expense charges, surrender charges, and payout options.
Worked example
A client earns $100,000, has a $300,000 mortgage, wants $200,000 for education, and estimates $20,000 final expenses. Liquid assets are $150,000 and existing life insurance is $250,000. Using a 10× income replacement assumption, the need is $1,000,000 + $300,000 + $200,000 + $20,000 − $150,000 − $250,000 = $1,120,000. The adviser should test a lower multiple and account for Social Security survivor benefits and group coverage.
Traps
- Confusing human life value with the needs approach.
- Ignoring group life, Social Security, and spousal income.
- Buying liability limits below net worth.
- Failing to coordinate beneficiaries and ownership.