AAFM AAFM Financial Planning Principles 4

Question 1

A young single professional with no dependents is deciding on life insurance. Which need is typically lowest for this client?

Accepted Answer

Income replacement for dependents

Answer

With no dependents relying on their income, the need for income-replacement life insurance is minimal.

Question 2

Which type of risk is best managed by transferring it to an insurance company?

Accepted Answer

Low-frequency, high-severity risk

Answer

Insurance is most efficient for rare but potentially catastrophic losses.

Question 3

What is the primary advantage of tax-deferred retirement accounts in planning?

Accepted Answer

Contributions and growth are not taxed until withdrawal

Answer

Tax deferral lets contributions and earnings compound without annual taxation until distribution.

Question 4

A client's diversified portfolio still carries which type of risk that cannot be diversified away?

Accepted Answer

Systematic (market) risk

Answer

Systematic risk affects the whole market and remains despite diversification.

Question 5

Which asset allocation is generally most appropriate for an investor with a long time horizon and high risk tolerance?

Accepted Answer

A higher weighting toward equities

Answer

Long horizons and high risk tolerance favor equities for greater long-term growth potential.

American Academy of Financial Management (AAFM) Practice Test