FREE AFC Risk Management and Insurance Questions and Answers

Question 1

A client is reviewing their homeowner's insurance policy and is confused about the difference between an HO-3 and an HO-5 policy. Which of the following is the most significant advantage of an HO-5 policy over an HO-3 policy?

Accepted Answer

HO-5 provides open peril coverage for personal property, while HO-3 typically provides named peril coverage.

Answer

The primary distinction between an HO-3 and an HO-5 policy is the coverage for personal property. An HO-5 policy offers 'open peril' coverage, meaning belongings are covered against all perils unless specifically excluded. An HO-3 policy, conversely, typically covers personal property only for 'named perils' explicitly listed in the policy. Both policy types generally provide open peril coverage for the dwelling structure itself.

Question 2

An AFC® is working with a client who has a disability income insurance policy with a 90-day elimination period. The client becomes disabled on June 1st. When can the client expect to receive their first benefit payment?

Accepted Answer

Shortly after August 30th

Answer

The elimination period, also known as the waiting period, is the length of time from the onset of disability that must pass before benefits become payable. With a 90-day elimination period, the client must wait 90 days from June 1st, which ends on August 30th. Benefit payments begin to accrue after this period and are typically paid in arrears, so the first payment would be received shortly after the waiting period is satisfied.

Question 3

Which of the following risk management strategies involves shifting the financial consequences of a loss to another party, such as an insurance company?

Accepted Answer

Risk Transfer

Answer

Risk transfer is a core principle of insurance. It is the strategy of shifting the financial burden of a potential loss from an individual or entity to another party. Purchasing an insurance policy is the most common example of risk transfer, where the insurer agrees to cover specified losses in exchange for premium payments. Risk avoidance means not participating in the activity at all, risk retention is accepting the risk, and risk reduction involves taking steps to lower the severity or likelihood of a loss.

Question 4

A client is at fault in a car accident. Their auto insurance liability coverage is listed as 100/300/50. One person in the other car sustains injuries with medical bills totaling $120,000. How much will the client's insurance policy pay for this individual's bodily injury claim?

Accepted Answer

$100,000

Answer

A split limit liability policy, commonly expressed as three numbers (e.g., 100/300/50), sets specific maximums. The first number ($100,000) is the maximum payout for bodily injury per person. The second ($300,000) is the maximum for total bodily injury per accident. The third ($50,000) is the maximum for property damage. In this scenario, even though the total per-accident limit is higher, the per-person limit caps the payout for the single injured individual at $100,000.

Question 5

A client with significant assets, including a home, investments, and future earnings, is concerned about being sued for an amount that exceeds the liability limits on their homeowners and auto insurance policies. Which type of insurance would an AFC® explain is specifically designed to provide an additional layer of liability protection above other policies?

Accepted Answer

Personal Umbrella Insurance

Answer

A personal umbrella policy provides extra liability coverage that sits on top of existing homeowners, auto, and other liability policies. Its main purpose is to protect assets and future income from major lawsuits or claims when the limits of the underlying policies are exhausted.

AFC - Accredited Financial Counselor Practice Test

AFC - Accredited Financial Counselor Practice Test

FREE AFC Risk Management and Insurance Questions and Answers