WMS Risk Management and Insurance Solutions 2 — Questions and Answers
Question 1: A client owns a business and wants to protect against the financial impact of a key employee's death. Which insurance solution is most appropriate?
- Business overhead expense insurance
- Key person life insurance (Correct answer)
- Buy-sell agreement funded by disability insurance
- Group term life insurance
Correct answer: Key person life insurance
Key person life insurance reimburses the business for lost revenue and costs to find a replacement when a critical employee dies.
Question 2: Which of the following best describes 'pure risk' in the context of wealth management?
- Risk that offers only the possibility of gain
- Risk that involves only the chance of loss or no loss (Correct answer)
- Risk arising from speculative investments
- Risk associated with currency fluctuation
Correct answer: Risk that involves only the chance of loss or no loss
Pure risk involves only two outcomes—loss or no loss—and is the type of risk typically covered by insurance.
Question 3: A 55-year-old client is concerned about outliving retirement assets. Which insurance product directly addresses longevity risk?
- Whole life insurance with cash value
- Long-term care insurance
- Deferred income annuity (DIA) (Correct answer)
- Disability income insurance
Correct answer: Deferred income annuity (DIA)
A deferred income annuity provides guaranteed lifetime income beginning at a future date, directly mitigating longevity risk.
Question 4: Which type of life insurance policy allows the policyholder to adjust the death benefit and premium payments within certain limits?
- Term life insurance
- Whole life insurance
- Universal life insurance (Correct answer)
- Variable annuity
Correct answer: Universal life insurance
Universal life insurance offers flexible premiums and adjustable death benefits, distinguishing it from fixed whole life policies.
Question 5: An umbrella liability policy is best described as:
- A policy that replaces all underlying liability coverage
- A policy that provides excess coverage above underlying policy limits (Correct answer)
- A policy that covers only professional liability claims
- A policy that covers property and casualty combined
Correct answer: A policy that provides excess coverage above underlying policy limits
Umbrella liability policies activate after underlying auto, homeowners, or other liability limits are exhausted, providing additional protection.
Question 6: What is the primary purpose of a disability buy-sell agreement funded by insurance?
- To replace lost business income during an owner's disability
- To fund the purchase of a disabled owner's business interest (Correct answer)
- To pay ongoing business overhead expenses during disability
- To provide income replacement for disabled employees
Correct answer: To fund the purchase of a disabled owner's business interest
A disability buy-sell agreement ensures that if an owner becomes disabled, the remaining owners can purchase their business interest using insurance proceeds.
Question 7: Which long-term care insurance benefit trigger is most commonly required before benefits begin?
- Diagnosis of any chronic illness
- Inability to perform 2 of 6 Activities of Daily Living (ADLs) (Correct answer)
- Hospitalization for more than 30 days
- A physician's recommendation for nursing home care
Correct answer: Inability to perform 2 of 6 Activities of Daily Living (ADLs)
Most LTC policies require the insured to be unable to perform at least 2 of 6 ADLs (bathing, dressing, eating, continence, transferring, toileting) to trigger benefits.
WMS Risk Management and Insurance Solutions 2
A client owns a business and wants to protect against the financial impact of a key employee's death.
Which insurance solution is most appropriate?