WMS Risk Management and Insurance Solutions 3 — Questions and Answers
Question 1: A client's homeowner's insurance pays only the actual cash value for a destroyed roof rather than replacing it. This reduction reflects:
- Co-insurance penalty
- Depreciation (Correct answer)
- Sublimit application
- Deductible offset
Correct answer: Depreciation
Actual cash value (ACV) equals replacement cost minus depreciation, so older property receives reduced claims payments.
Question 2: Which of the following best illustrates the concept of 'risk transfer' in personal financial planning?
- Maintaining a liquid emergency fund
- Purchasing a life insurance policy (Correct answer)
- Diversifying an investment portfolio
- Avoiding high-risk recreational activities
Correct answer: Purchasing a life insurance policy
Purchasing insurance transfers the financial consequences of a risk from the individual to the insurance company.
Question 3: A variable life insurance policy differs from a whole life policy primarily because:
- Variable life has no cash value accumulation
- The death benefit is fixed regardless of performance
- Cash value is invested in sub-accounts and varies with market performance (Correct answer)
- Premiums are flexible and adjustable by the policyholder
Correct answer: Cash value is invested in sub-accounts and varies with market performance
Variable life insurance directs the cash value into investment sub-accounts, meaning the account value fluctuates with market returns.
Question 4: The 'incontestability clause' in a life insurance policy means that after a specified period, the insurer:
- Cannot cancel the policy for non-payment of premiums
- Cannot deny a claim based on misrepresentation in the application (Correct answer)
- Must return all premiums paid if the insured is healthy
- Can raise premiums without limitation
Correct answer: Cannot deny a claim based on misrepresentation in the application
After the incontestability period (typically 2 years), insurers cannot void the policy or deny a claim due to misstatements on the original application.
Question 5: A client operates a medical practice. Which professional liability policy should the wealth manager recommend to protect against malpractice claims?
- Directors and Officers (D&O) insurance
- Errors and Omissions (E&O) insurance
- Medical malpractice insurance (Correct answer)
- Commercial general liability insurance
Correct answer: Medical malpractice insurance
Medical malpractice insurance covers physicians and healthcare providers against claims arising from professional negligence or treatment errors.
Question 6: What does the 'elimination period' in a disability income policy represent?
- The maximum number of months benefits are payable
- The waiting period before disability benefits begin (Correct answer)
- The period during which the insurer can contest claims
- The time required to prove total disability status
Correct answer: The waiting period before disability benefits begin
The elimination period is the waiting period after disability onset before the policy begins paying benefits, functioning like a deductible measured in time.
Question 7: Which type of annuity provides the highest initial payout but leaves a surviving spouse with no continued income?
- Joint and survivor annuity
- Life only (straight life) annuity (Correct answer)
- Period certain annuity
- Qualified longevity annuity contract (QLAC)
Correct answer: Life only (straight life) annuity
A life-only annuity provides the maximum monthly income but payments stop at the annuitant's death, with no survivor benefits.
WMS Risk Management and Insurance Solutions 3
A client's homeowner's insurance pays only the actual cash value for a destroyed roof rather than replacing it.
This reduction reflects: