Certified Financial Planner (CFP) Risk Management and Insurance Planning Syllabus

Risk Management and Insurance Planning syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Risk Management and Insurance Planning in Certified Financial Planner (CFP), not a summary of it.

1. 1

   Principles of Risk and Insurance

   4 topics

   • Risk Identification and Measurement
     • Pure vs. speculative risk
     • Risk management techniques (avoid, retain, transfer, reduce)
   • Insurance Contract Fundamentals
     • Insurable interest and indemnity
     • Adverse selection and moral hazard
   • Legal Aspects of Insurance Contracts
     • Representations, warranties, and concealment
     • Riders, exclusions, and endorsements
   • Insurance Company Selection and Ratings
2. 2

   Life Insurance Planning

   4 topics

   • Determining Life Insurance Needs
     • Human life value approach
     • Needs analysis (capital retention vs. liquidation)
   • Types of Life Insurance
     • Term life insurance
     • Whole, universal, and variable universal life
   • Policy Provisions and Dividend Options
     • Nonforfeiture and settlement options
     • Policy loans and surrender values
   • Taxation of Life Insurance Proceeds and Cash Value
3. 3

   Health, Disability, and Long-Term Care

   4 topics

   • Health Insurance and the ACA
     • HMO, PPO, and high-deductible plans
     • Health Savings Accounts (HSAs)
   • Disability Income Insurance
     • Definitions of disability and elimination periods
     • Taxation of benefits
   • Long-Term Care Insurance
     • Benefit triggers and inflation protection
     • Hybrid LTC policies
   • Medicare and Medicaid Coordination
4. 4

   Property, Casualty, and Annuity Risk

   4 topics

   • Homeowners and Renters Insurance
     • HO forms and coverage parts
     • Replacement cost vs. actual cash value
   • Personal Automobile Policy
     • Liability, collision, and comprehensive coverage
   • Personal Liability and Umbrella Coverage
   • Annuities as Risk Transfer Tools
     • Fixed, variable, and indexed annuities
     • Annuitization and payout options

Risk Management and Insurance Planning flashcards for Certified Financial Planner (CFP)

19 of 62 cards from the Risk Management and Insurance Planning deck — real questions with worked answers.

1. What are the four classic methods of handling risk in the risk management process?

   Risk avoidance, risk reduction (control/loss prevention), risk retention (self-insuring), and risk transfer (e.g., insurance).

2. In risk management, how do you decide between retention and transfer based on loss frequency and severity?

   Low frequency / low severity: retain. High frequency / low severity: reduce or retain. Low frequency / high severity: transfer (insure). High frequency / high severity: avoid.

3. Distinguish a pure risk from a speculative risk and state which is insurable.

   A pure risk has only the possibility of loss or no loss (no chance of gain) and is insurable. A speculative risk involves a chance of loss, no loss, or gain (e.g., gambling, investing) and is generally not insurable.

4. Define the law of large numbers and its role in insurance.

   As the number of similar, independent exposure units increases, actual loss experience converges toward the expected (predicted) loss. It lets insurers predict aggregate losses accurately and set premiums.

5. List the requisites (ideal characteristics) of an insurable risk.

   Large number of homogeneous exposure units; loss is definite (time, place, amount) and measurable; loss is accidental/fortuitous; loss is not catastrophic to the insurer; premium is economically feasible; and the chance of loss is calculable.

6. Differentiate a peril from a hazard, and name the three types of hazards.

   A peril is the immediate cause of loss (fire, theft). A hazard is a condition that increases the likelihood or severity of a loss. Three types: physical, moral (dishonesty/intent to cause loss), and morale (carelessness/indifference) hazards.

7. What is adverse selection and how do insurers control it?

   Adverse selection is the tendency of those with higher-than-average risk to seek insurance more than average risks. Insurers control it through underwriting, medical exams, exclusions, waiting periods, and risk-based pricing.

8. What are the four essential elements required to form a valid insurance contract?

   Offer and acceptance, consideration, legal (competent) parties, and legal purpose.

9. Define the principle of indemnity in insurance.

   The insured should be restored to the same financial position held before the loss, with no profit from the loss. It applies to property/casualty contracts but not to valued/life contracts.

10. Explain the characteristic of an insurance contract being a contract of adhesion and its legal consequence.

    The insurer drafts the contract on a take-it-or-leave-it basis, so the insured has no bargaining power over terms. Consequently, ambiguities are construed against the drafter (the insurer).

11. Why is an insurance contract considered aleatory rather than commutative?

    It is aleatory because the dollar amounts exchanged are unequal and depend on a fortuitous event; one party may receive far more (or far less) than the premium paid, unlike a commutative contract of equal value exchange.

12. Define insurable interest and state when it must exist for life versus property insurance.

    Insurable interest means a person would suffer financial loss if the insured event occurs. For life insurance it must exist at policy inception (issue). For property insurance it must exist at the time of loss.

13. Distinguish a representation, a warranty, and a concealment in insurance contract law.

    A representation is a statement believed true that, if materially false, may void the contract. A warranty is a guarantee of truth that must be literally true. Concealment is the intentional failure to disclose a material fact, which can void coverage.

14. What is the principle of utmost good faith (uberrimae fidei)?

    Both parties, especially the applicant, must deal honestly and disclose all material facts. Insurance relies on the insured's truthful disclosure because the insurer cannot inspect every risk.

15. Define subrogation and its purpose.

    Subrogation gives the insurer the right, after paying a claim, to recover the amount from a negligent third party who caused the loss. It supports indemnity and prevents the insured from collecting twice.

16. What is waiver versus estoppel in insurance law?

    Waiver is the voluntary, intentional relinquishment of a known right by the insurer. Estoppel prevents the insurer from later asserting a right when the insured relied on the insurer's prior conduct to their detriment.

17. What does it mean that an insurance contract is unilateral?

    Only the insurer makes a legally enforceable promise (to pay covered losses). The insured makes no enforceable promise to continue paying premiums; failure to pay simply ends coverage.

18. Which agencies rate insurer financial strength, and what does a high rating indicate?

    A.M. Best, Standard & Poor's, Moody's, and Fitch. A high rating (e.g., A++ from Best, AAA from S&P) indicates strong claims-paying ability and low likelihood of insolvency.

19. What is the A.M. Best rating scale's top designation, and what entity protects policyholders if an insurer becomes insolvent?

    A.M. Best's top rating is A++ (Superior). State guaranty associations protect policyholders (up to statutory limits) when an insurer becomes insolvent.

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