Financial Planning Exam Preparation Guide
Course Introduction
Financial Planning introduces students to the essential concepts and techniques for managing personal and organizational finances. The course covers budgeting, cash flow management, debt reduction, investment strategies, retirement planning, insurance, tax considerations, and the development of comprehensive financial plans. Emphasis is placed on setting financial goals, evaluating different financial products, and understanding the strategies necessary to achieve long-term financial security. Through case studies, simulations, and practical exercises, students will develop the analytical and decision-making skills needed to create and implement effective financial plans for individuals and businesses.
Recommended Textbook
Introduction to Risk Management and Insurance 10th Edition by Mark S. Dorfman
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23 Chapters
1358 Verified Questions
1358 Flashcards
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Page 2
Chapter 1: Introduction to Enterprise Risk Management and Insurance
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Sample Questions
Q1) What are the three basic methods of dealing with risk in the risk management process?
Answer: The only three alternatives to risk are to 1) avoid, 2) retain, or 3) transfer. All other methods are extensions or combinations of these three. Self-insurance is retention. Loss control (prevention and/or reduction) on the other hand is used to reduce the frequency and/or severity of losses, regardless of whether the exposure has been retained or transferred. This decision is usually subject to a cost benefit analysis.
Q2) The law of large numbers states that as the number of exposure units increases:
A) accuracy of predictions should improve
B) the chance of loss declines
C) Speculative risk increases
D) the number of accidents decreases
Answer: A
Q3) Most speculative risks are insurable.
A)True
B)False
Answer: False
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Chapter 2: Risk Identification
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Sample Questions
Q1) Which of the following is not true about liability risks?
A) Liability risk is where the firm may be legally responsible for the harm it causes to another person.
B) Liability risks are sometimes overlooked due to their intangible nature.
C) Only a breach of contract and criminal acts can lead to liability risk for a firm.
D) A tort can lead to a liability risk.
Answer: C
Q2) If assumption of the risk is established, it means the defendant usually must pay for damages.
A)True
B)False
Answer: False
Q3) Provide a statement of the overall goal of the risk management function.
Answer: The overall goal of the risk management function is to make efficient pre-loss decisions to prepare for the post-loss financial consequences of losses in order to minimize the overall impact (disruption) to the firm and dollar losses.
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4
Chapter 3: Risk Assessment and Pooling
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Sample Questions
Q1) Which of the following statements about the risk pooling is correct?
A) Risk pooling works best if the parties involved have heterogeneous risk characteristics.
B) Risk pooling works best if the number of parties involved is small.
C) Risk pooling works best if the loss experience of the parties involved is statistically dependent.
D) Risk pooling, assuming some assumptions are met, reduce overall risk.
Answer: D
Q2) Which of the following statements about the risk charge is correct?
A) The Risk Charge represents how much an insurance company should charge for people not paying their insurance premium.
B) The Risk Charge can only be calculated when the probability distribution is normal.
C) The Risk Charge is what is added to and subtracted from the Estimated Mean to get to the Confidence Interval.
D) All of the above are incorrect.
Answer: C
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Chapter 4: Risk-Handling Techniques: Loss Control, Risk
Transfer, and Loss Financing
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Sample Questions
Q1) If insurers have insufficient pricing information available for a particular exposure:
A) they go bankrupt
B) they will need to create a larger risk pool
C) they will probably be unwilling to provide insurance for that particular loss exposure
D) they will assume more risk
Q2) Insurance increases moral hazard.
A)True
B)False
Q3) There are no clear rules for choosing an appropriate risk-handling technique.
A)True
B)False
Q4) Jim S. buys a $50,000 car. Rather than buying insurance on the car, he sets aside $30,000 in a savings account to cover possible losses due to an accident. He is:
A) self-insuring
B) a moral hazard
C) assuming risk
D) decreasing his risk of physical loss
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Chapter 5: Risk-Handling Techniques: Diversification and Hedging
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Sample Questions
Q1) The correlation coefficient is calculated by taking the square root of the variance.
A)True
B)False
Q2) Which of the following statements about Enterprise Risk Management is incorrect?
A) It deals with a limited number of techniques.
B) It has expanded the responsibilities of the corporate risk manager.
C) It deals with pure risks.
D) It deals with speculative risks.
Q3) Which of the following statements about bearing risk collectively is correct?
A) Bearing risk collectively is not very cost-efficient.
B) Bearing risk collectively only works for small groups.
C) Bearing risk collectively is bearing risk as part of a large group.
D) All of the above are correct.
Q4) One of the benefits of bearing risk collectively is that the group can better afford to obtain better data compared to one company alone.
A)True
B)False
Q5) Explain the importance of the correlation coefficient for diversification.
Q6) Explain when and why a call option has value.
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Chapter 6: Fundamentals of Insurance
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Sample Questions
Q1) The expense ratio equals:
A) total underwriting expenses divided by insured losses
B) net income divided by total expenses
C) total expenses divided by net income
D) total expenses divided by premiums written
Q2) Proximate cause means:
A) the first insured peril in a chain of events leading to a loss
B) the event nearest the peril in time
C) the event nearest the peril in space
D) the event nearest the loss in time and space
Q3) The lack of annuities for life insurance is a serious problem in the U.S.
A)True
B)False
Q4) Under an open perils insurance policy:
A) covered perils are spelled out, usually using a numbered list
B) any piece of property not excluded is covered
C) absolutely all risks of losses are covered, those having an illegal purpose
D) all perils not excluded are covered
Q5) Explain briefly why insurance functions as an antimonopoly device.
Q6) Discuss the building blocks of an insurance premium.
Page 8
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Chapter 7: Insurable Perils and Insuring Organizations
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Sample Questions
Q1) Earthquake insurance:
A) is provided too cheaply by insurance companies
B) typically costs $1 per $20,000 protection
C) is sold in only a limited number of geographical markets
D) is bought by Californians only
Q2) All the following statements are true concerning mutual insurance companies <u>except</u>:
A) they may pay dividends
B) they are owned by their policyholders
C) they are legally organized as perpetual partnerships
D) they are nonprofit
Q3) A mutual insurer:
A) is not a corporation
B) is run by an attorney-in-fact
C) is legally a nonprofit organization
D) technically is a charitable organization
Q4) Of all evaluation criteria to determine whether a risk classification is appropriate, simplicity is the most important one.
A)True
B)False
Page 9
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Chapter 8: Insurance Functions
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Sample Questions
Q1) When a reinsurer cedes coverage to another reinsurer, it is called retrocession.
A)True
B)False
Q2) Reinsurance transactions do not occur in life insurance.
A)True
B)False
Q3) The brokerage function does not exist in life insurance sales.
A)True
B)False
Q4) In Austin's agency contract, the insurer authorizes him to sell insurance policies, but does not specifically authorize him to make telephone calls to prospective clients. He makes such calls anyway. Does he have the authority to make these calls, and if so, what type of authority is this?
A) No, he has no such authority.
B) Yes, and it is express authority.
C) Yes, and it is incidental authority.
D) Yes, and it is apparent authority.
Q5) In reinsurance, the reinsurer is also known as the "ceding" company.
A)True
B)False
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Chapter 9: Insurance Markets: Economics and Issues
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Sample Questions
Q1) Comparison shopping for insurance is generally not worthwhile since very little price variation is found in either life or property insurance.
A)True
B)False
Q2) FAIR plans guarantee insurance to all applicants.
A)True
B)False
Q3) The individual consumer must ultimately deal with several issues to make an efficient purchase in the insurance market. Which of the following generally should not be a major consideration?
A) The type of policy covering the exposure(s)
B) The maximum amount of insurance coverage
C) The commission the agent will receive from the sale
D) The insurance agent's expertise
Q4) The main thrust of state insurance regulation with respect to the consumer has been to protect consumers from abusive practices, and to protect them from insolvent insurers.
A)True
B)False
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Chapter 10: Insurance Regulation
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Sample Questions
Q1) Which of the following is not a stated purpose of regulation?
A) Promote competition among the largest insurers in the state
B) Maintain insurer solvency
C) Deal with unique pricing problems that do not allow for full and unrestrained competition
D) Promote social goals
Q2) Explain briefly the purpose of the McCarran Act.
Q3) The Appleton Rule applies to all insurance companies doing business in Wisconsin. A)True
B)False
Q4) Life insurance companies have a debtor/creditor relationship with their living insureds that is similar to a fiduciary relationship. A)True
B)False
Q5) One result of the Gramm-Leach-Bliley act has been:
A) the separation of banks and insurance companies
B) greater consistency of agent licensing requirements across state lines
C) increased restrictions on where agents and insurers may operate
D) both A and C
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Chapter 11: Insurance Contracts
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Sample Questions
Q1) Tiffany, who is married to Saul, takes out a $1,000,000 life insurance policy on Saul's life in 2008. Two years later they get divorced and Tiffany immediately remarries. Saul is not required to pay any alimony or child support to Tiffany after the divorce. In 2015, Saul dies. What will Tiffany collect on the life insurance policy, assuming she continued to pay all premiums due following their divorce?
A) $0, because Tiffany has no insurable interest
B) $1,000,000, because Tiffany had insurable interest in Saul's life when the policy was purchased
C) $1,000,000, because Tiffany had insurable interest in Saul's life at the time of his death
D) $0, because Saul was not ordered to pay alimony to Tiffany
Q2) Under a contract of adhesion:
A) subrogation is not allowed
B) ambiguous features are interpreted against the writer of the contract
C) ambiguous features are interpreted always against the insurer
D) ambiguous features are decided based upon the intent of the parties when the contract was entered
Q3) Explain the principle of subrogation. Provide a mathematical example of its use.
Q4) Describe the purposes of deductibles.
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Page 13
Chapter 12: The Personal Auto Policy
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Sample Questions
Q1) Which of the following is true?
A) Suing an uninsured motorist for damages they cause you to suffer is not a promising source of recovery.
B) If you are struck by an uninsured motorist and want your PAP's Uninsured Motorist coverage to pay for your bodily injuries, you must convince your insurer that the Uninsured Motorist was at-fault in the incident.
C) If you cannot clearly establish that an uninsured motorist was at fault in the accident, you may have to enter the arbitration process to get your insurer to pay for your damages under the PAP's Uninsured Motorist coverage.
D) All of the above
Q2) A PAP may be canceled at any time for any reason if the insurance company no longer wants to insure you.
A)True
B)False
Q3) What is the difference between Collision and Other than Collision coverages? Why does the PAP list certain perils in Other than Collision when they can be caused by collision? What happens if the cause of loss is not listed?
Q4) Explain the purpose of Uninsured Motorist coverage.
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Page 14
Chapter 13: Homeowners Insurance
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Sample Questions
Q1) Grave markers are usually covered by HO policies.
A)True
B)False
Q2) All of the following losses are covered in an HO-3 policy <u>except</u>:
A) damage done to the house by neighborhood vandals
B) damage done to shrubbery during a fire
C) loss of use of the property following a fire
D) damage done to the building and contents caused by a flash flood
Q3) All the following are provisions in the HO-3 contract that can decrease amounts payable by the insurance company <u>except</u>:
A) deductibles
B) coinsurance/replacement cost provisions
C) special limits on certain types of property
D) mortgage clause
Q4) Which of the following perils is <u>not</u> covered by the HO-3 form?
A) Windstorm or hail
B) Riot or civil commotion
C) Sudden and accidental smoke damage
D) Volcanic earthquakes
Q5) Explain the concept of concurrent causation as it applies to collapse.
Page 15
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Chapter 14: Professional Financial Planning
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Sample Questions
Q1) Which of the following is <u>not</u> a task of a financial planner?
A) Help their clients develop financial goals for the future
B) Collect data about the various aspects of the financial situation of their clients
C) Decide on the implementation of a financial plan
D) Educate their clients with respect to the optimal financial plan
Q2) "Probate" is best-defined as:
A) choosing investments for a trust fund at death
B) selecting the beneficiary of a trust fund after death of the donor
C) administration of an estate following death of an individual
D) supervising the transfer of property at death
Q3) Which of the following needs for life insurance would be considered permanent?
A) Education fund for surviving children
B) Income fund for surviving children
C) Debt-retirement fund
D) Burial fund
Q4) The trustee of a trust fund is responsible for determining the beneficiary of the fund's assets.
A)True
B)False
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Chapter 15: Life Insurance Policies
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Sample Questions
Q1) Which of the following policies would have the highest premium for a standard risk male age 27?
A) Level term
B) Whole life continuous premium
C) Whole life paid-up at 65
D) 10-pay whole life
Q2) In a limited payment policy, only a portion of the face amount is paid if death occurs in the early years.
A)True
B)False
Q3) Why does the death benefit increase under certain conditions in the universal life Plan A (fixed face amount)?
Q4) Whole life insurance policy sales have declined in recent years. Which of the following is not a reason for this decline?
A) Term life insurance is typically a better choice for most consumers.
B) Term life insurance policies offer very competitive rates and attractive prices.
C) Variable life policies have gained popularity.
D) Inflation in the late 1970s and early 1980s
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Chapter 16: Standard Life Insurance Contract Provisions and Options
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Sample Questions
Q1) The double indemnity option makes good sense for most families since the cost is low, and the option doubles the face amount of insurance for most causes of death other than accident.
A)True
B)False
Q2) Cheryl buys a life insurance policy with a two-year incontestable clause, and dies three years later. When she dies, her insurer discovers that she lied on application for coverage about her diabetes. What will happen?
A) The insurer will pay the claim.
B) The insurer will void the policy and not pay the claim because Cheryl made a material misrepresentation on her application.
C) The insurer will void the policy and not pay the claim based on the principle of indemnity.
D) Both B and C above
Q3) One life insurance dividend option is to allow dividends to accumulate with compound interest with the insurance company.
A)True B)False
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Chapter 17: Annuities
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Sample Questions
Q1) Choose the recipient of the largest dollar amount of annual annuity receipts for a $100,000 single-premium immediate annuity:
A) male age 65
B) female age 65
C) male age 25
D) female age 20
Q2) A cash refund annuity would have lower monthly benefits per $1,000 of premium than an installment refund annuity.
A)True
B)False
Q3) Which annuity provides for a built-in reduction of monthly payments after a specified event occurs?
A) Joint annuity
B) Joint and last survivor annuity
C) Pure reduction annuity
D) Joint and one-half survivor annuity
Q4) Fixed dollar annuities are widely used as a hedge against inflation.
A)True
B)False
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Chapter 18: Health Insurance and Disability Income
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Sample Questions
Q1) Which is the most desirable type of health insurance renewability feature?
A) Nonrenewable
B) Noncancellable
C) Guaranteed renewable
D) Optionally renewable
Q2) Individual Medicaid policies must return in benefits at least 60 percent of the premium earned.
A)True
B)False
Q3) Jean's health insurance policy has a 70/30 participation deductible. The policy has no other deductible provisions, nor does it have an annual out-of-pocket maximum limit. If Jean has brain transplant surgery that results in medical bills of $300,000, how much of the medical bills will her insurer pay?
A) $210,000
B) $90,000
C) $300,000
D) cannot be determined from the given information
Q4) Explain how a typical major medical contract works.
Q5) Distinguish between cost shifting and cost containment in health care.
Q6) What is the difference between an HMO and a PPO in providing health care?
Page 20
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Chapter 19: Employee Benefits
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Sample Questions
Q1) Explain how employees are taxed on group life insurance supplied as an employee benefit.
Q2) From an employee's perspective, tax deferral is beneficial because:
A) current taxes are increased in return for reduced taxes later
B) money can be invested that would ordinarily be paid in current income taxes
C) tax rates in the future are guaranteed to be lower
D) since tax policy varies, there may be no tax on retirement income in the future
Q3) The primary purpose of a 401(k) plan is to:
A) save for retirement on a tax-deferred basis
B) save for retirement on a tax-free basis
C) save for retirement and have your employer match your contributions, all on a tax-free basis
D) have a forced savings plan for emergencies
Q4) Short term disability programs continue the employee's salary for six or fewer months.
A)True
B)False
Q5) Explain the advantages to an employer of a defined benefit pension plan versus a defined contribution pension plan.
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Chapter 20: Social Security
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Sample Questions
Q1) Medicare's prescription drug plan:
A) has a $50 deductible
B) may negotiate with pharmaceutical companies to get lower medication prices
C) must, by law, negotiate with pharmaceutical companies to get lower medication prices
D) has a corridor deductible besides a regular deductible
Q2) Social Security is financed by a tax on:
A) employees and employers
B) only on employees
C) only on employers
D) all residents of the United States
Q3) Each of the following is a Social Security benefit <u>except</u>:
A) retirement
B) unemployment
C) survivor
D) disability
Q4) The private insurance system and the Social Security system are both "fully-funded."
A)True
B)False
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Chapter 21: Unemployment and Workers Compensation Insurance
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Sample Questions
Q1) Explain how a worker can be disqualified for unemployment benefits.
Q2) Workers' compensation is likely to cover all the following <u>except</u>:
A) 100 percent of lost wages during disability
B) medical expenses
C) rehabilitation expenses
D) reasonable funeral expenses
Q3) Which of the following is <u>not</u> a requirement for receiving unemployment benefits?
A) Experience a waiting period before benefits are paid
B) Have an earnings record
C) Have a continuing interest in employment
D) The national unemployment percentage must exceed a certain level
Q4) What is the federal covered maximum wage for unemployment insurance taxation?
A) $700
B) $7,000
C) $70,000
D) $700,000
Q5) What are the general types of benefits provided under workers' compensation?
Q6) List and explain briefly the purposes of the workers' compensation laws.
Q7) Explain the economic significance for the existence of unemployment insurance. Page 23
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Page 24
Chapter 22: Commercial Property Insurance
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Sample Questions
Q1) If the Bartow Publishing House sends a shipment of textbooks to the university bookstore via a common carrier, it needs:
A) no inland marine insurance because the trucking company already has this coverage
B) inland marine insurance because a shipper cannot recover from a common carrier
C) liability insurance to sue the common carrier for the carrier's legal liability
D) inland marine insurance, even though it can collect a liability claim from the carrier, because such collection could be slow and potentially expensive
Q2) The Broad Cause of Loss form adds perils to the Basic Cause of Loss form but does not increase the dollar amount of coverage.
A)True
B)False
Q3) Ocean marine policies are typically "specified perils" contracts.
A)True
B)False
Q4) What are the categories of business income losses? Briefly explain each.
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Chapter 23: Commercial Liability Insurance
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Q1) All of the following would be covered by an Environmental Impairment Liability (EIL) policy <u>except</u>:
A) chicken processor dumps pollution into a stream and ruins nearby drinking water
B) chemical plant releases toxic gases and makes nearby residents sick
C) gas station leaks gasoline from underground storage tanks
D) chemical firm mislabels a chemical which causes injury to the user
Q2) Long-tail claims are those filed:
A) as a result of animal injuries
B) by shareholders against the board of directors of a corporation
C) several years after the actual injury takes place
D) in a no-fault state
Q3) The ADA holds a business responsible for providing:
A) guaranteed jobs for disabled workers
B) opportunities for disabled workers
C) opportunities for drunk workers
D) retirement benefits for disabled workers
Q4) Explain the need for a claims-made form. Explain how a liability insurance contract written on a claims-made form works.
Q5) Explain the idea behind business liability umbrella policies.
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