Certified Financial Planner Risk Management and Insurance Planning

1.Camille is offered a weekend jet-ski rental stand. She turns down the lease because one serious injury claim could exhaust her savings. She does not open the stand. How did she treat that liability risk?

2.Andre keeps his bakery open. He installs a hood suppression system so a grease fire would be smaller and would be put out sooner. What did he do to the fire risk?

3.Beth invites guests to her house. She buys a personal liability policy that pays covered guest-injury judgments above a deductible she still handles. What is that insurance purchase?

4.Omar's workshop tools can break. He keeps $15,000 in a repair fund, buys no breakdown policy, and uses the tools every workday. How is he treating that breakdown risk?

5.Fiona owns a detached garage. A fire would destroy it. If no fire happens, that outcome pays her nothing. How is the fire exposure classified?

6.Grant buys a vacant lot for $90,000. He hopes to resell it for more, and he knows he may have to sell it for less. How is that resale-price risk classified?

7.Helen still opens her shop every morning. After two break-in attempts on her block, she adds a deadbolt and an alarm. What is the main effect on burglary risk?

8.Ivan carries collision coverage with a $1,000 deductible. A covered crash causes $6,000 of damage. In his risk plan, how is the $1,000 treated?

9.Jade's renters policy can pay for a fire in her apartment. The same week she risks $500 on a basketball score, which she can win or lose. Which exposure is the pure risk?

10.Elena's family would lose $70,000 of her income each year for 10 years. The plan uses a simple capital-needs figure of 10 times that income. She has $200,000 of group life and $50,000 of savings reserved for this gap. How much more life insurance does the figure call for?

11.Luis has a 20-year mortgage and two children who will finish school in 18 years. His budget is tight. He has no lifelong dependent and no estate-tax need. Which policy fits the income the family would lose?

12.Nora's adult son will need financial support for the rest of his life, and no one else can provide it. She can pay a higher premium and wants a death benefit that does not expire. Which choice matches?

13.Malik's household would lose $40,000 a year for 15 years if he died. The planner's simple capital-needs figure is that income times the years, with no interest discount. He already has $100,000 of life insurance. What additional amount fills the figure?

14.Priya is 34 and supports two children for about 16 more years. She is comparing a low premium for temporary protection with a higher premium that builds cash value. She has no permanent estate need. What should she buy for the income the family would lose?

15.Victor wants a death benefit in force at an advanced age so his estate can pay costs. He can afford the higher premium for life, and the capital need has no calendar end. Which type fits?

16.Ruth's family would lose $60,000 of her income a year for 8 years. The simple capital-needs figure is 8 times the uncovered loss. Survivor benefits already replace $20,000 a year, and she has no other life insurance. How much insurance replaces the rest?

17.Chris has a 10-year income gap of $50,000 a year. The simple capital-needs figure is $500,000, and his budget is tight. A permanent premium would force him to cut the face amount in half. What purchase covers the figure?

18.Dana's plan sets a simple capital need of $800,000 for income the family would lose. She already has $150,000 of life insurance and $50,000 of liquid assets counted toward that need. What new death benefit closes the gap?

19.Irene owns whole life. Her sister owns universal life. Which element of Irene's whole life contract is set out as guaranteed?

20.Sam owns universal life. The contract guarantees a minimum interest credit of 2 percent, and the insurer is currently crediting 4 percent. Which statement is right?

21.Tara owns variable life. The cash value is invested in equity subaccounts she chose. What is true of that cash value?

22.Owen's whole life policy shows one scheduled premium. His brother's universal life policy lets the brother change what he pays. What is guaranteed about Owen's premium?

23.Lila owns universal life. She paid more than the target premium for three years. This year she wants to pay less, and the cash value can cover the current charges if she does. What may she do?

24.Colin owns variable life and chose aggressive stock subaccounts. The market falls, and the cash value falls with it. Who bears that investment result?

25.Nina's universal life contract lists a current cost-of-insurance charge and a higher guaranteed maximum charge. The insurer raises the current charge, and it is still below that maximum. What happened?

26.Paul owns participating whole life. The illustration shows a dividend, and one was declared last year. What is true of next year's dividend?

27.Rhea owns traditional variable life and pays the scheduled premium. The contract states a minimum death benefit if those premiums are paid. The cash value is in subaccounts. Which pairing is right?

28.Alan is both the insured and the owner of a $1,000,000 life policy. His daughter is the beneficiary. He can change the beneficiary and can surrender the policy. At his death, are the proceeds in his gross estate?

29.Beatrice is insured by a policy an irrevocable life insurance trust owns. The trust applied for the policy. The file says Beatrice holds no incidents of ownership. Are the proceeds in her gross estate?

30.Carl is the insured. His wife Diane is the owner. Carl's brother is the beneficiary. While the policy is in force, who can change the beneficiary?

31.Edgar is the insured. His wife Faith owns the policy, pays the premiums, and can surrender it. Edgar cannot change the beneficiary or borrow. Are the proceeds in Edgar's gross estate?

32.Greg is the insured, his sister Holly is the owner, and his son Ian is the beneficiary. Who must die for the policy to pay, and who receives the check?

33.June owns a policy on her own life and names her son as beneficiary. She asks whether the proceeds are in her gross estate and whether they pass through probate. What is accurate?

34.Karl is the insured and is not the named owner. The policy still gives him the right to take a policy loan, and he has never used it. What does that unused right mean for his gross estate?

35.Leah is the insured. An irrevocable life insurance trust owns the policy and is the beneficiary. She never owned the policy, and the file says she has no incidents of ownership. Where are the proceeds?

36.Martin is the beneficiary of a policy his father owns on the father's life. Martin asks whether he can surrender the policy for cash while his father is alive. Can he?

37.Dr. Adeyemi is a surgeon. After a hand injury she can teach, but she cannot operate. Her disability policy pays if she cannot perform the duties of her own occupation. Which definition is that?

38.Ben is choosing disability coverage. A 180-day elimination period has a lower premium than a 30-day period. The monthly benefit and the benefit period are the same. What does the longer elimination period mean?

39.Carla is 40. A disability would end her career, and she wants income until the retirement age of 65 she already planned. One policy pays for 2 years. Another pays to age 65. Which benefit period matches that goal?

40.Diego is an electrician covered by an any-occupation disability policy. After an injury he cannot do electrical work, but he can do a desk job that fits his training. The insurer denies the claim. Why?

41.Farah's disability policy pays $4,000 a month after a 90-day elimination period, which the plan treats as 3 months. She is disabled for 9 months from the onset and then returns to work. How much does the policy pay?

42.Grace is a trial lawyer. She wants benefits if she cannot try cases, even if she could still grade bar exams. She is comparing disability definitions. Which one matches that goal?

43.Henry is shown two disability quotes that match except for the elimination period. One uses 30 days and the other uses 180 days. Which quote has the higher premium, and why?

44.Iris is 35 and is offered disability coverage with a 2-year benefit period. She expects to work until 65, and she has little other income. If a disability is permanent, what gap does that period leave?

45.Jamal can buy either an own-occupation or an any-occupation disability policy. He wants the definition that makes it harder to qualify. Which one is stricter?

46.Keisha's high-deductible health plan has a $2,000 deductible, 20 percent coinsurance, and a $6,000 out-of-pocket maximum. A covered bill is $8,000. She has had no other claims this year. What does she pay?

47.Leo's high-deductible plan has a $3,000 deductible, 20 percent coinsurance, and a $6,000 out-of-pocket maximum. One covered stay is billed at $40,000. He has had no other claims. What does he pay?

48.Mara has self-only high-deductible coverage and a health savings account. The contribution limit that applies to her this year, as stated for her coverage, is $4,400. Her employer contributes $1,000. How much may she contribute?

49.Noah wants to contribute to a health savings account. His only health plan has a $500 deductible, well below high-deductible coverage, and he has no other health plan. May he contribute?

50.Olivia spent only part of her health savings account this year. She asks whether the unused balance disappears on December 31, as her old flexible spending account did. What happens to the health savings account balance?

51.Pete's high-deductible plan pays a listed preventive screening at 100 percent before the deductible. The screening is billed at $180. His deductible is $1,700, and he has had no other care. What does he pay for that screening?

52.Quiana has already paid her $5,500 out-of-pocket maximum this year on covered services under her high-deductible plan. A later covered bill is $2,200. Coinsurance is 20 percent until that maximum. What does she pay on the later bill?

53.Raul's high-deductible plan has a $1,600 deductible and 10 percent coinsurance after that. His first covered bill of the year is $1,000, and he has met none of the deductible. What does he pay?

54.Sara, age 40, withdraws $900 from her health savings account to pay a qualified medical bill. The withdrawal does not exceed her qualified expenses. How is the $900 taxed?

55.Theo's long-term-care policy reimburses covered charges up to a $200 daily benefit after a 90-day elimination period. The facility charges $250 a day. He needs covered care for 120 days, and each day of care counts toward the elimination period. How much does the policy pay?

56.Uma's long-term-care policy starts at a $150 daily benefit with a 3 percent simple inflation rider. Each year the rider adds 3 percent of the original $150. What is the daily benefit after 10 years?

57.Vince is pricing long-term-care coverage. Moving the elimination period from 30 days to 90 days lowers the premium. The daily benefit and the benefit period stay the same. What does he give up for that lower premium?

58.Wendy's mother received care for six years. Wendy, age 55, is choosing between a 2-year benefit period and a 5-year benefit period. She is worried about a long claim and can pay more. Which period covers more of a long stay?

59.Xander buys a $180 daily long-term-care benefit and declines the inflation rider. The contract has no other increase provision. Care is likely many years away. What happens to the $180 as time passes?

60.Yara's long-term-care policy states a $200 daily benefit and a 3-year benefit period. The pool is the daily benefit times 365 times 3. What is the pool?

61.Aaron's long-term-care policy has a $200 daily benefit and a 5 percent compound inflation rider. The benefit compounds once each year. What is the daily benefit after two years?

62.Bianca's long-term-care policy has a 90-day elimination period and a $160 daily benefit. She asks whether the 90 days are a $90 deductible. What is the elimination period?

63.Caleb's long-term-care policy reimburses the charge for covered care up to a $210 daily benefit. After the elimination period, the facility charges $175 on a covered day. No inflation adjustment applies that day. How much does the policy pay for the day?

64.Dina's house has a replacement cost of $500,000. She carries $300,000 of dwelling coverage. A covered partial loss is $80,000, and there is no deductible. The insurer requires 80 percent of replacement cost and pays (carried ÷ required) × loss when she is short. What is paid?

65.Eli's house has a replacement cost of $400,000. He carries $320,000, exactly 80 percent. A covered partial loss is $40,000, and the deductible is $1,000. The dwelling is settled at replacement cost when that 80 percent test is met. What is paid?

66.Fatima's roof has a replacement cost of $20,000 and $8,000 of depreciation. This roof settlement is actual cash value, and no deductible applies in the calculation. What is paid?

67.George's dwelling has a replacement cost of $250,000. He carries $150,000. A covered loss is $40,000, and there is no deductible. Required insurance is 80 percent of replacement cost. The payment is (carried ÷ required) × loss. What is paid?

68.Hana's home has a replacement cost of $400,000. She carries $250,000. A covered fire is a total loss of $400,000, and there is no deductible. The coinsurance fraction is carried divided by 80 percent of replacement cost, but the insurer will not pay more than the policy limit. What is paid?

69.Isaac meets the 80 percent replacement-cost condition on his dwelling. A covered kitchen costs $15,000 to replace, and depreciation is $4,000. The deductible is $0. How is this dwelling loss settled?

70.Julia's house has a replacement cost of $600,000. She carries $360,000. A covered loss is $100,000. The $1,000 deductible is subtracted after the coinsurance fraction. Required insurance is 80 percent of replacement cost. What is paid?

71.Keith's sofa is stolen. A new one costs $2,000, and depreciation is $500. Personal property is settled at actual cash value, and a $250 deductible is applied to that value. What is paid?

72.Lena's dwelling has a replacement cost of $600,000. She wants the dwelling limit that meets the 80 percent coinsurance test exactly, so a partial loss is not reduced by that penalty. What limit is that?

73.Marco's auto policy has split limits of 100/300/50, meaning $100,000 bodily injury per person, $300,000 bodily injury per accident, and $50,000 property damage. One person in the other car has $160,000 of injuries. No one else is hurt, and there is no property damage. What does the auto policy pay for the injuries?

74.Nia's auto limits are 100/300/50. Four people in the other car each have $80,000 of injuries. No property is damaged. What does the auto policy pay in total for bodily injury?

75.Otto's auto limits are 50/100/25. He damages a building and two parked cars, and the covered property damage is $40,000. No one is injured. What does the property-damage coverage pay?

76.Paige carries auto liability of 250/500/100 and a $1,000,000 umbrella that sits above those limits and requires at least that underlying coverage. One person has a covered injury claim of $700,000. The umbrella follows the auto policy for this claim. How is the $700,000 paid?

77.Quentin's umbrella requires underlying auto limits of 250/500/100 and does not cover the gap below that required limit. He actually carries 100/300/50. One covered injury to a single person is $400,000. What does Quentin pay from that gap?

78.Rosa's auto limits are 100/300/50. Two people are injured, one for $140,000 and one for $40,000. Property damage is $10,000. What does the auto policy pay in total?

79.Samir has an auto policy and an umbrella that sits above it. A covered liability claim is within his auto limits. He asks the umbrella insurer to pay from the first dollar and leave the auto policy unused. What is the umbrella's role on this claim?

80.Tessa's auto property-damage limit is $50,000. Her umbrella requires $50,000 of underlying property damage and pays above it. A covered property-damage claim is $80,000. How is it divided?

81.Uri's auto limits are 250/500/100, and his $1,000,000 umbrella requires those limits and sits above them. One person has $900,000 of covered injuries. No other claim is made. What does the umbrella pay?

82.Vera owns a nonqualified deferred annuity. She paid $100,000 in premiums. It is now worth $160,000, and she withdraws $20,000 before any annuitization. Earnings are taxed when distributed, and basis is not. How much of the withdrawal is taxable?

83.Walter, age 68, holds a lump sum outside a retirement plan. He wants income to start next month and continue for life. He does not want a period of accumulation first. Which contract matches?

84.Yolanda's annuity sits inside a traditional individual retirement account. She deducted every contribution, so her basis is zero. At age 70 she takes a $10,000 distribution. How much of it is taxable?

85.Zack buys a nonqualified immediate annuity with $200,000 of after-tax money. The contract states an expected return of $250,000. His annual payment is $12,500. Using the exclusion ratio, how much of each annual payment is taxable?

86.Amy's nonqualified deferred annuity holds $80,000 of premiums and $15,000 of earnings. She withdraws $25,000 before annuitizing. Earnings are taxed when distributed, and basis is not. How much of the withdrawal is taxable?

87.Blake is 45. He wants to put after-tax savings into an annuity that grows for 20 years before any payment starts. He does not want a check next month. Which contract fits that delay?

88.Carmen is 50, still working, and has extra after-tax cash. She wants the earnings to compound without current tax, and she does not need income now. She will not use a retirement-plan contribution. Which pairing fits?

89.Devon bought a nonqualified deferred annuity with $50,000. It is now worth $58,000, and he withdraws the entire amount. Earnings are taxed when distributed, and basis is not. How much is taxable?

90.Esther takes $6,000 from each of two annuities. Contract Q is qualified and has zero basis. Contract N is nonqualified, has $2,000 of earnings, and she withdraws from it before annuitizing. Earnings are taxed when distributed, and basis is not. How much of the $12,000 is taxable?

91.Farid's company depends on his product designs. The company buys a life policy on Farid, owns it, and names itself beneficiary so it can fund recruiting if he dies. What is that arrangement?

92.Gina and Hugo are equal owners. Their cross-purchase buy-sell is funded with life insurance, and each will buy the other's share if the other dies. How are the policies set up?

93.Ira, Jo, and Ken are equal shareholders. They want the company to redeem a deceased shareholder's stock, and they will fund that promise with life insurance. Who should own the policies?

94.Lana is a sole proprietor. If she is disabled, her business overhead policy is meant to keep the firm running. Monthly rent is $4,000, staff payroll is $6,000, utilities are $500, and her personal draw is $8,000. Which amount is that overhead benefit aimed at?

95.Mateo is insured under a key-person policy his employer owns, and the employer is the beneficiary. His spouse asks whether that death benefit will come home to replace his paycheck. What is the right answer?

96.Nadia and Oscar each own half of a business worth $900,000. Their cross-purchase agreement requires the survivor to buy the decedent's half, and life insurance is meant to fund that price. What face amount should the policy each owns on the other person have?

97.Pia, Quinn, and Rae are partners. Each survivor will buy a deceased partner's share directly, and each of those purchases is funded by policies the buyers own on the others. How many life policies does that cross-purchase use?

98.Sonia and her co-owner use a cross-purchase buy-sell. When the co-owner dies, Sonia uses the life insurance proceeds to buy his shares from his estate. What is Sonia's basis in the shares she buys?

99.Seth is disabled. The business overhead policy is paying the firm's rent and the staff's wages. He also wants that same policy to pay the household grocery bill. What can this overhead policy be used for here?

100.Thea replaces a life policy that has been in force for nine years. The old contestable period has expired. The new policy has a two-year contestable period that starts at its own issue. What is true in the month after the new policy is issued?

101.Ulrich surrenders a life policy to fund a replacement. The cash value is $40,000, the surrender charge is $7,000, and there is no loan. How much cash does the surrender produce?

102.Willa is 70. Her whole life policy is paid up, its contestable period expired years ago, and she has no new insurance need. An agent urges a replacement with a 10-year surrender charge and a new two-year contestable period. The illustration depends on nonguaranteed values. What is this replacement?

103.Xavier surrenders a policy to help pay for a replacement. Cash value is $40,000, the surrender charge is $6,000, and the policy loan of $5,000 is repaid from the cash value in the surrender. How much cash is left?

104.Yvette's 20-year term policy ends next month. She still has 15 years of income to replace, she is healthy, and a new term policy has a lower premium for the same face amount. The old policy has no cash value and no surrender charge. Is this replacement unsuitable?

105.Zane's old life policy is past its contestable period. He replaces it. Two months later he dies, and the new application omitted a material diagnosis. The new policy is still in its contestable period. What can the new insurer do that the old insurer no longer could?

106.Adele's annuity is worth $100,000. A replacement quotes a credit rate 0.40 percentage points higher, and that higher rate is not guaranteed. The move triggers a $12,000 surrender charge. She has no other reason to replace it. What is the conclusion?

107.Boris, age 62, can keep a policy with $30,000 of cash value and no remaining surrender charge. A replacement would impose a $4,500 surrender charge and start a new two-year contestable period. He has no new insurance need. What does the charge consume, and what else restarts?

108.Cora was diagnosed with a serious illness last month. Her old life policy is past its contestable period and can still pay if she dies. An agent tells her to replace it and to leave the diagnosis off the new application. Why is that replacement unsuitable?