Free CFP Exam Risk Management and Insurance Planning Practice Questions
Risk management and insurance planning on the CFP exam tests analysis of life, health, disability, property, and liability insurance needs, along with risk assessment and mitigation strategies for clients at various life stages (CFP Board).
Sample Questions
Question 1
Easy
Which of the following best describes the law of large numbers as it applies to insurance?
Solution
A is correct.
The law of large numbers is a fundamental statistical principle stating that as the number of independent exposure units (policyholders) increases, the actual results will more closely approximate the expected (predicted) results. This allows insurers to predict aggregate losses with greater precision and set appropriate premiums.
The law of large numbers is a fundamental statistical principle stating that as the number of independent exposure units (policyholders) increases, the actual results will more closely approximate the expected (predicted) results. This allows insurers to predict aggregate losses with greater precision and set appropriate premiums.
Question 2
Medium
Which of the following is a commercial risk exposure that would NOT typically be covered under a standard homeowners policy?
Solution
B is correct.
Standard homeowners policies typically exclude or severely limit coverage for business property and business liability. A home-based business owner who stores $25,000 of business equipment at home would generally find that coverage is excluded or capped at a low sublimit (often $2,500). The homeowner would need a home business endorsement or separate commercial policy.
Standard homeowners policies typically exclude or severely limit coverage for business property and business liability. A home-based business owner who stores $25,000 of business equipment at home would generally find that coverage is excluded or capped at a low sublimit (often $2,500). The homeowner would need a home business endorsement or separate commercial policy.
Question 3
Hard
TechStart Inc. wants to retain its top software engineer, Ahmed, using an executive bonus plan under Section 162. Which of the following best describes how this arrangement works?
Solution
C is correct.
Under a Section 162 executive bonus plan, the employer pays a bonus to a selected executive (taxable to the executive as compensation). The executive uses the bonus to pay premiums on a personally owned life insurance policy. The employer deducts the bonus as a business expense. The executive owns the policy and controls the cash value and death benefit. This is a non-qualified arrangement with no ERISA requirements. Some plans 'gross up' the bonus to cover the executive's tax liability on the bonus.
Under a Section 162 executive bonus plan, the employer pays a bonus to a selected executive (taxable to the executive as compensation). The executive uses the bonus to pay premiums on a personally owned life insurance policy. The employer deducts the bonus as a business expense. The executive owns the policy and controls the cash value and death benefit. This is a non-qualified arrangement with no ERISA requirements. Some plans 'gross up' the bonus to cover the executive's tax liability on the bonus.