Risk Management and Insurance in Financial Planning Flashcards
6 cards from real Investment Advisor practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Risk Management and Insurance in Financial Planning flashcards as text
Which type of life insurance provides a death benefit for a specified term and has no cash value component?
Answer: Term life insurance
Term life insurance provides pure death benefit protection for a defined period (e.g., 20 years) with no savings or cash value component, making it the most affordable option.
An investment adviser recommending insurance products to clients should consider the client's insurance needs as part of which planning area?
Answer: Comprehensive risk management within the financial plan
Insurance is a key component of comprehensive risk management — protecting a client's human capital, assets, and estate — and should be integrated into the overall financial plan.
What does 'systematic risk' refer to in portfolio management?
Answer: Market-wide risk that cannot be diversified away
Systematic risk (market risk) affects the entire market and cannot be eliminated through diversification — examples include recessions, interest rate changes, and geopolitical events.
An investor holds a portfolio of 50 individual stocks. Further adding more stocks will primarily reduce which type of risk?
Answer: Unsystematic (company-specific) risk
Diversification eliminates unsystematic (idiosyncratic or company-specific) risk, while systematic risk remains regardless of how many stocks are held.
Which risk describes the possibility that inflation will erode the purchasing power of a portfolio's returns?
Answer: Inflation (purchasing power) risk
Inflation risk (purchasing power risk) is the risk that investment returns will not keep pace with inflation, reducing the real value of wealth over time.
An investment adviser recommending a client purchase disability income insurance is primarily addressing which risk?
Answer: The risk of loss of earned income due to illness or injury
Disability income insurance replaces a portion of income lost when a client cannot work due to illness or injury, protecting their most important financial asset — their earning capacity.