Principles of Financial Plan Quiz

Question 1. During your recent meeting with Ron, a new client, you discussed the concept of risk. You defined several terms for Ron. Which of the following terms is defined as: the possibility of loss, but no possibility of gain?
Pure Risk.
Perils.
Risk Transfer.
Open-perils.

Question 2. Which of the following would not be considered a personal risk?
Becoming disabled due to a car accident.
Injuring a passenger in your vehicle during an auto accident that was your fault.
Dying at age 42 given a normal life expectancy of age 80.
Being diagnosed with a curable form of cancer.

Question 3. You recently met with your client, Don, age 40. Don is widowed and has one dependent child. During your meeting with him you discussed the concept of risk management. Which of the following statements regarding the ways to manage risk is incorrect?
The selling of Don's Jet Ski is an example of risk reduction.
Not purchasing life insurance is an example of risk retention.
Purchasing a warranty is an example of risk transfer.
Insurance is not necessary for every risk of financial loss.

Question 4. If a risk has a high frequency of occurrence and a high severity, you should:
Transfer the risk.
Retain the risk.
Reduce the risk.
Avoid the risk.

Question 5. Ginny and Max own a rental home on the Gulf Coast. They insured their property with their local insurance company. The policy provides protection against losses caused by perils that are specifically listed as covered in the policy. What type of policy do they have?
All-risk policy.
Open-perils policy.
Named-perils policy.
Identified-perils policy.

Question 6. Jennifer had a very bad year. She wrecked her car in January when she ran a red light (because she could not see properly having left her contacts at home) and crashed into another car completely destroying both cars. The insurance company was very nice to her and she purchased a new car with the insurance proceeds. Jennifer decided that since she had insurance, it really did not matter if she took proper care of her new car because she could always get a new one. Jennifer got in the habit of leaving her new car unlocked and it was stolen. After Jennifer bought another car she decided that she really liked the insurance adjuster and wanted to see him again, so one day she purposefully set her car on fire. In her carelessness, she also caught her hand on fire. Jennifer was depressed over her circumstances and decided she didn't want to go back to work. She filed a falsified disability claim for the loss of use of her hand (even though she could still use her hand). Which of the following statements is true?
Driving with poor eyesight is not a hazard.
Leaving the car unlocked is a morale hazard.
Burning the car on purpose is a morale hazard.
Filing a false disability claim is a morale hazard.

Question 7. Which of the following is most likely to be an insurable risk?
Intentionally burning down your house.
War.
Gambling losses.
An automobile accident due to negligence.

Question 8. You recently met with your client, Tripp, to discuss his insurance policies. Tripp was reading a book on contracts and wanted to know how his insurance contract related to the material he was reading and to his circumstances. During your conversation, Tripp made several statements to clarify that he understood insurance. Which of the following statements would you have told him was incorrect?
An insurance contract is unilateral, where both parties agree to a legally enforceable promise.
The insurance contract is aleatory, where unequal monetary values are exchanged.
An insurance contract is based on the principal of indemnity, where the insured cannot make a profit from a claim on insurance.
An insurance contract is a contract of adhesion, where the insured accepts the contract as written and is unable to negotiate the terms of the contract.

Question 9. Erin purchased a life insurance policy on her own life. Her husband Mike is the beneficiary of the policy. Which of the following is not a necessary legal element of the contract?
Offer and acceptance.
Legal competency of all parties.
Consideration.
Listed beneficiary.

Question 10. Joe wants to purchase a life insurance policy on his own life. He is interested in learning about the various approaches to determine the amount needed. Which of the following is not true regarding the three most common approaches?
The human life value method estimates the present value of income generated over a person's work life expectancy and is then adjusted for the expected consumption of the survivors.
The financial needs method evaluates the income replacement and lump-sum needs of the survivors after the insured dies.
The capitalization of earnings method determines need by dividing the client's gross income by the riskless rate of return.
In practice a financial planner would utilize all three methods and then determine the client's needs based on a combination of factors including affordability.