NAB Risk Management and Insurance 1 — Questions and Answers
Question 1: What is the purpose of insurance in financial planning?
- To transfer financial risk from an individual to an insurance company in exchange for premiums (Correct answer)
- To increase investment returns
- To reduce taxes
- To earn interest on deposits
Correct answer: To transfer financial risk from an individual to an insurance company in exchange for premiums
Insurance protects against financial losses by pooling risk among many policyholders, with the insurer paying claims from collected premiums.
Question 2: What is the difference between term life and whole life insurance?
- Term covers a specific period; whole life covers your entire life and builds cash value (Correct answer)
- They are identical
- Term life is more expensive
- Whole life has no cash value component
Correct answer: Term covers a specific period; whole life covers your entire life and builds cash value
Term life insurance provides coverage for a set period (10, 20, 30 years) at lower premiums, while whole life provides lifelong coverage with a savings component that builds cash value.
Question 3: What is a deductible in insurance?
- The amount you pay out of pocket before insurance coverage begins (Correct answer)
- The monthly premium payment
- The maximum the insurance will pay
- A discount on your premium
Correct answer: The amount you pay out of pocket before insurance coverage begins
A deductible is your share of costs before the insurance company starts paying. Higher deductibles generally mean lower premiums.
Question 4: What is liability insurance?
- Coverage that protects you against claims for causing bodily injury or property damage to others (Correct answer)
- Insurance for your own medical expenses
- Coverage for your personal property
- Life insurance for dependents
Correct answer: Coverage that protects you against claims for causing bodily injury or property damage to others
Liability insurance pays for injuries or damage you cause to others, protecting your personal assets from lawsuits and claims.
Question 5: What is an emergency fund and why is it important?
- Three to six months of expenses saved for unexpected financial needs (Correct answer)
- Money set aside for vacations
- A retirement savings account
- A type of insurance policy
Correct answer: Three to six months of expenses saved for unexpected financial needs
An emergency fund provides a financial buffer for unexpected expenses like medical bills, car repairs, or job loss, preventing the need for high-interest debt.
Question 6: What is the relationship between risk and return in investing?
- Higher potential returns generally come with higher risk (Correct answer)
- There is no relationship
- Higher risk always guarantees higher returns
- Lower risk investments always have higher returns
Correct answer: Higher potential returns generally come with higher risk
The risk-return tradeoff means that investments with potential for higher returns typically carry greater risk of loss, and vice versa.
NAB Risk Management and Insurance 1
What is the purpose of insurance in financial planning?