AFC Insurance & Risk Management Strategies 2 — Questions and Answers
Question 1: A 35-year-old with two young children and a non-working spouse asks about life insurance. What type provides the most coverage per premium dollar?
- Whole life insurance
- Term life insurance (Correct answer)
- Universal life insurance
- Variable life insurance
Correct answer: Term life insurance
Term life insurance provides the highest coverage amount per premium dollar because it offers pure death benefit without cash value.
Term life provides death benefit protection for a specified period (10, 20, or 30 years) without cash value accumulation. A healthy 35-year-old might pay $30-50/month for $500,000 of 20-year term, while equivalent whole life could cost $400-600/month. Financial counselors typically recommend term covering 10-12 times annual income, lasting until the youngest child is independent.
Question 2: What is the primary purpose of disability insurance in a comprehensive financial plan?
- To pay medical bills during illness
- To replace a portion of income if the insured cannot work (Correct answer)
- To cover long-term care facility costs
- To provide a death benefit to dependents
Correct answer: To replace a portion of income if the insured cannot work
Disability insurance replaces a portion of earned income (typically 60-70%) when the insured cannot work due to qualifying illness or injury.
A 35-year-old earning $60,000 has approximately $1.8 million in future earnings. A 20-year-old worker has roughly a 25% chance of becoming disabled before retirement. Key policy features include own-occupation vs. any-occupation definition, benefit period, residual disability benefits, and cost-of-living adjustments.
Question 3: A client has a $200,000 home with a $150,000 mortgage and $300,000 dwelling coverage. What should the counselor identify?
- The policy is overinsured relative to market value
- The coverage may be appropriate if it reflects the replacement cost to rebuild (Correct answer)
- The deductible is likely too high
- Coverage should be reduced to the mortgage balance
Correct answer: The coverage may be appropriate if it reflects the replacement cost to rebuild
Homeowner's insurance should cover replacement cost to rebuild, not market value or mortgage balance. Replacement cost can exceed market value.
Replacement cost can exceed market value because market value includes land (which survives a loss), market conditions can depress values below construction costs, and building codes may require expensive upgrades during rebuilding. A $200,000 market value home in a high-construction-cost area might genuinely require $300,000 to rebuild.
Question 4: Which health insurance plan type typically requires a referral from a primary care physician to see a specialist?
- PPO
- HMO (Correct answer)
- EPO
- HDHP
Correct answer: HMO
HMO plans require members to select a primary care physician who serves as a gatekeeper for specialist referrals.
HMOs use a gatekeeper model with lower premiums, limited out-of-network coverage, required PCP selection, and referral requirements. PPOs allow self-referral and out-of-network coverage. EPOs don't require referrals but limit coverage to in-network. HDHPs can be structured as any model type.
Question 5: A client is choosing between a low-deductible plan ($500 deductible, $450/month) and a high-deductible plan ($3,000 deductible, $250/month) with HSA. What analysis should the counselor perform?
- Recommend low-deductible for more immediate coverage
- Calculate total annual cost under various utilization scenarios (Correct answer)
- Recommend high-deductible because premiums are lower
- Choose based solely on monthly premium
Correct answer: Calculate total annual cost under various utilization scenarios
A thorough comparison requires modeling total costs under different utilization scenarios, plus considering HSA tax advantages.
Low-use scenario: Low-ded = $5,400 premiums + $500 = $5,900; HDHP = $3,000 + $500 = $3,500. The HDHP saves $2,400/year in premiums which can fund an HSA with triple tax benefits. The break-even point helps determine which plan wins financially. The counselor should present this analysis alongside health history and risk tolerance.
Question 6: What is an umbrella insurance policy and when should a counselor recommend one?
- A bundled home and auto policy
- An excess liability policy providing additional coverage beyond existing auto and homeowner's policies (Correct answer)
- A weather-related damage policy
- A short-term temporary risk policy
Correct answer: An excess liability policy providing additional coverage beyond existing auto and homeowner's policies
An umbrella policy provides excess liability coverage (typically starting at $1 million) above auto and homeowner's policy limits.
Umbrella policies start at $1 million and cost $200-400/year. They are recommended for clients with significant assets, rental property, teenage drivers, pools, dogs, or high public visibility. Coverage should equal or exceed net worth. The remarkably low cost relative to coverage makes umbrella insurance one of the best values in risk management.
AFC Insurance & Risk Management Strategies 2
A 35-year-old with two young children and a non-working spouse asks about life insurance.
What type provides the most coverage per premium dollar?