7. Manage Financial Risks (9%)

Question 1

What is the primary purpose of financial risk management?

A. To increase returns on investments
B. To protect against unforeseen financial losses
C. To maximize discretionary spending
D. To ensure liquidity in all accounts

Answer 1

B. To protect against unforeseen financial losses.

Financial risk management aims to reduce the impact of unexpected losses.

Question 2

Which of the following is an example of a financial risk?

A. Employment change
B. Inflation.
C. Interest rate fluctuation.
D. All of the above.

Answer 2

D. All of the above.

Employment change, inflation, and interest rate fluctuation are common financial risks

Question 3

What does the term “loss control” refer to in risk management?

A. Increasing income to offset risks
B. Reducing the frequency or severity of a potential loss
C. Avoiding insurance coverage
D. Maximizing investment returns

Answer 3

B. Reducing the frequency or severity of a potential loss

Loss control strategies are implemented to minimize the occurrence and impact of financial losses.

Question 4

Which type of insurance protects against income loss due to disability?

A. Life insurance
B. Disability insurance
C. Property insurance
D. Health insurance

Answer 4

B. Disability insurance.

Question 5

Which of the following is considered a liability risk?

A. A car loan
B. Lawsuits from injuries occurring on your property
C. A mortgage
D. A tax lien

Answer 5

B. Lawsuits from injuries occurring on your property

Liability risks relate to legal obligations, such as being sued for injury occurring on your property.

Question 6

What is the primary purpose of life insurance?

A. To pay for future vacations
B. To provide financial support to beneficiaries after the policyholder’s death
C. To reduce taxable income
D. To increase an individual’s credit score

Answer 6

B. To provide financial support to beneficiaries after the policyholder’s death.

Life insurance provides financial protection to beneficiaries in the event of the insured’s death.

Question 7

Which type of insurance is required by law in most U.S. states?

A. Homeowners insurance
B. Health insurance
C. Auto liability insurance
D. Life insurance

Answer 7

C. Auto liability insurance

Most U.S. states require drivers to carry auto liability insurance.

Question 8

What is an umbrella policy?

A. A type of health insurance that covers all expenses
B. A policy that provides extra liability insurance above standard coverage limits
C. A savings plan for emergency expenses
D. A government-funded insurance plan

Answer 8

B. A policy that provides extra liability insurance above standard coverage limits

An umbrella policy provides additional liability protection beyond the coverage of standard insurance policies.

Question 9

What is the main benefit of a health savings account (HSA)?

A. It reduces mortgage payments
B. It offers tax advantages for qualified medical expenses
C. It increases social security benefits
D. It eliminates the need for health insurance

Answer 9

B. It offers tax advantages for qualified medical expenses

HSAs provide tax benefits when used for eligible medical expenses, allowing funds to grow tax-free.

Question 10

Which of the following factors most affects life insurance premiums?

A. The policyholder’s income
B. The policyholder’s health and age
C. The policyholder’s credit score
D. The policyholder’s marital status

Answer 10

B. The policyholder’s health and age

Life insurance premiums are largely determined by the insured’s health and age, as these factors influence life expectancy.

Question 11

A client is unsure about how much life insurance coverage they need. What factor should they prioritize when deciding?

A. Their annual discretionary spending
B. Their family’s future financial needs and liabilities
C. The cost of their current mortgage
D. The premiums offered by the lowest-cost insurance company

Answer 11

B. Their family’s future financial needs and liabilities.

The amount of life insurance should be based on covering future financial obligations, such as debt, living expenses, and education costs for beneficiaries.

Question 12

A client is considering whether to increase their emergency savings or purchase additional insurance coverage. How should they approach this decision?

A. Evaluate their current coverage for financial risks and the adequacy of their emergency fund
B. Always prioritize emergency savings over insurance
C. Purchase insurance only if it costs less than their monthly savings
D. Avoid purchasing any additional insurance

Answer 12

A. Evaluate their current coverage for financial risks and the adequacy of their emergency fund

The client should assess whether their current risk coverage is sufficient and if their emergency savings can handle unexpected events.

Question 13

A client is deciding whether to buy term life insurance or whole life insurance. Which factor should guide their decision?

A. Whether they want a savings component as part of the policy.
B. The length of time they have been employed.
C. The number of cars they own.
D. Their credit card balances.

Answer 13

A. Whether they want a savings component as part of the policy

Whole life insurance includes a savings component, while term life is purely protection for a specific period.

Question 14

A client wants to know how much they should contribute to their health savings account (HSA) each year. What would you suggest?

A. Contribute the maximum allowed by law if they expect significant medical expenses
B. Only contribute if they are in poor health
C. Contribute only to meet their annual deductible
D. Avoid contributing if they have a low income

Answer 14

A. Contribute the maximum allowed by law if they expect significant medical expenses

Contributing the maximum to an HSA provides the greatest tax benefits and prepares the client for future healthcare costs.

Question 15

A client is considering whether to purchase additional disability insurance. What question should they ask themselves?

A. How much would they need to replace their income if they were unable to work?
B How many years until retirement?
C. How long their mortgage will take to pay off.
D. Whether they have a family history of disability.

Answer 15

A) How much would they need to replace their income if they were unable to work?

Disability insurance replaces income, so the client should determine how much coverage they would need to maintain their standard of living.

Question 16

A client asks if they should purchase long-term care insurance. What factors should they consider?

A. Their family’s history of medical issues
B. The potential cost of long-term care and their ability to pay for it out-of-pocket
C. The proximity of nursing homes
D. The number of family members they have

Answer 16

B. The potential cost of long-term care and their ability to pay for it out-of-pocket

Long-term care insurance helps cover the costs of care that may not be affordable out-of-pocket, making it essential for clients with limited savings.

Question 17

A client wants to reduce the cost of their home insurance premiums. What is one option you could suggest?

A. Increase the deductible on the policy
B. Reduce the amount of liability coverage
C. Switch to a monthly payment plan
D) Avoid claims altogether

Answer 17

A. Increase the deductible on the policy

Increasing the deductible typically reduces premium costs but requires the client to pay more out-of-pocket if a claim is made.

Question 18

A client’s auto insurance premium increased after they filed a claim. What could they have done to minimize the increase?

A. Filed a lawsuit against the insurer
B. Increased their deductible to reduce premiums before filing the claim
C. Filed multiple claims instead of just one
D. Avoided buying full coverage on their vehicle

Answer 18

B. Increased their deductible to reduce premiums before filing the claim

A higher deductible usually lowers premiums, though it increases out-of-pocket costs for claims.

Question 19

A client is concerned about potential identity theft. Which strategy would best protect them?

A. Ignoring any suspicious transactions on their credit card
B. Regularly monitoring their credit report for unauthorized activity
C. Only using cash for all transactions
D. Never shopping online

Answer 19

B. Regularly monitoring their credit report for unauthorized activity

Regular monitoring of credit reports can help detect any unauthorized activity early, minimizing the risk of identity theft.

Question 20

A client is evaluating different health insurance plans. Which factor should they consider to minimize out-of-pocket costs for frequent medical visits?

A. Choosing a plan with the lowest monthly premium
B. Selecting a plan with the lowest deductible and co-pays
C. Opting for the plan with the highest deductible
D. Avoiding health insurance altogether

Answer 20

B. Selecting a plan with the lowest deductible and co-pays

Lower deductibles and co-pays reduce the client’s out-of-pocket expenses when seeking regular medical care.

Question 21

A client is trying to decide whether to purchase disability insurance or rely on savings in case of a disability. What financial risk should they assess before making this decision?

A. The amount of their current mortgage
B. Their ability to cover expenses if they were unable to work for an extended period
C. Their retirement account balance
D. Their credit card debt

Answer 21

B. Their ability to cover expenses if they were unable to work for an extended period

Disability insurance replaces lost income during an extended disability, so the client needs to assess whether their savings would be sufficient without insurance.

Question 22

A client is choosing between two health insurance plans: one with a low premium and high deductible, and another with a high premium and low deductible. What factor should guide their decision?

A. How frequently they expect to use medical services
B. The cost of the plans’ copayments for prescription drugs
C. The reputation of the insurance company
D. The proximity of their primary care physician

Answer 22

A. How frequently they expect to use medical services

A high-deductible plan might be cost-effective for someone who rarely uses medical services, while a low-deductible plan could be better for frequent users.

Question 23

A client’s home was damaged in a flood, but they do not have flood insurance. What financial risk management principle did they overlook?

A. Risk retention
B. Risk avoidance
C. Risk transfer
D. Risk diversification

Answer 23

C. Risk transfer

Insurance is a form of risk transfer, where financial responsibility for a risk (such as flooding) is transferred to an insurance company.

Question 24

A client wants to know if they should purchase long-term care insurance. They are in good health now but are concerned about future costs. What financial risk management strategy applies?

A. Risk avoidance.
B. Risk retention.
C. Risk reduction.
D. Risk transfer.

Answer 24

D Risk transfer

Long-term care insurance is a form of risk transfer, where the cost of future care is transferred to the insurer.

Question 25

A client has significant assets and is concerned about being sued. What type of insurance policy would you recommend to mitigate this risk?

A. Health insurance
B. Auto insurance
C. Umbrella liability insurance
D. Disability insurance

Answer 25

C. Umbrella liability insurance

Umbrella insurance provides additional liability protection beyond standard policies, which can help protect significant assets from lawsuits.

Question 26

A client is deciding whether to self-insure their car by increasing their deductible or keep a lower deductible with higher premiums. What factor should guide their decision?

A. Their cash flow and ability to pay a high deductible in case of an accident
B. The age of the car
C. The color of the car
D. How frequently they drive the car

Answer 26

A. Their cash flow and ability to pay a high deductible in case of an accident

If the client can afford to pay a higher deductible out-of-pocket, they can reduce their premiums, but they need to assess whether this is feasible based on their cash flow.

Question 27

A client is considering adding more coverage to their homeowner’s insurance after a major home renovation. What financial risk is this addressing?

A. The risk of underinsuring the property and facing out-of-pocket costs for damages.
B. The risk of paying too much in premiums.
C. The risk of overspending on utilities.
D. The risk of refinancing their mortgage.

Answer 27

A. The risk of underinsuring the property and facing out-of-pocket costs for damages

After a renovation, the home’s value may increase, requiring additional coverage to avoid underinsuring the property.

Question 28

A client is retired and is worried about outliving their retirement savings. What type of financial product might help manage this risk?

A. Term life insurance.
B. An annuity that provides guaranteed income for life.
C. A short-term disability policy.
D. A savings bond.

Answer 28

B. An annuity that provides guaranteed income for life

An annuity can provide a guaranteed income stream for life, helping mitigate the risk of outliving savings.

Question 29

A client is considering canceling their life insurance policy now that their children are financially independent. What risk should they consider before canceling?

A. The risk of future medical expenses
B. The risk that their beneficiaries might need financial support in the future
C. The risk of inflation
D. The risk of rising interest rates

Answer 29

B. The risk that their beneficiaries might need financial support in the future.

Even if children are financially independent now, circumstances could change, and life insurance might still be necessary for other potential beneficiaries.

Question 30

A client is deciding between buying earthquake insurance and setting aside money in savings in case of an earthquake. What financial risk strategy should guide their decision?

A. Risk avoidance.
B. Risk retention.
C. Risk transfer.
D. Risk acceptance.

Answer 30

C. Risk transfer

Purchasing earthquake insurance transfers the financial risk of earthquake damage from the client to the insurance company, while setting aside savings would be a form of risk retention.