A 45-year-old executive with a $2 million net worth, no dependents, and a paid-off home asks you to review her insurance. A colleague recommended a large term life policy. That recommendation is wrong, and on the exam, selecting it costs you the point. No dependents means no income replacement need. What she needs is disability protection, a personal umbrella, and a thorough liability evaluation.
Every individual faces exposures in five categories. Your job is to identify which apply, determine severity, and recommend treatment:
- Premature death: income earner dies before fulfilling financial obligations to dependents
- Disability: more likely than premature death during working years, yet routinely underinsured
- Health care costs: medical expenses exceeding insurance coverage
- Property loss: direct damage to property and indirect/consequential losses
- Liability: legal obligation to pay damages to someone else
Not every client faces the same level in each category. The exam tests whether you can spot which is most critical (and which is least relevant) for a given fact pattern.
Common mistakes
- Recommending term life for a client with no dependents. High net worth does not create premature death exposure without dependents. The exam uses impressive salary and asset figures as bait. No dependents = no income replacement need. Trap: "a $1M term policy" for a single high-earner with no dependents.
- Failing to calculate the after-tax disability benefit. When you see "60% replacement" with employer-paid premiums, candidates who report 60% as the effective rate miss the question. Always compute after-tax. Trap: "$150,000" when the correct after-tax figure is ~$102,000.
- Confusing direct and indirect property losses. Fire damage = direct. Lost rental income during repairs = indirect (consequential). A dwelling fire policy may cover the structure but not the income stream. Trap: "the dwelling fire policy covers lost rental income."
Bottom line
- Five personal risk exposures: premature death, disability, health care costs, property loss, liability. No dependents = no premature death exposure regardless of net worth.
- Employer-paid disability benefits are taxable: always calculate the after-tax replacement ratio.
- Frequency-severity matrix sets treatment: retain low-severity, transfer low-frequency/high-severity, avoid high-frequency/high-severity.
- Coinsurance formula: (amount carried / amount required) x loss, minus any applicable deductible.
Exam shortcut
When you see a detailed client profile, mentally run through all five exposures before answering. The "least appropriate" question format is common, identify the exposure that does not exist and pick the coverage addressing it. "No Dependents reflex", cross out life insurance. The trigger for premature death exposure is dependents, not dollars.
The full lesson (about 2,247 words, 15 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- C.18
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