Review Questions & Answers. Financial Planning Process & Insurance

Transcription

1 Review Questions & Answers Financial Planning Process & Insurance

2 , College for Financial Planning, all rights reserved. This publication may not be duplicated in any way without the express written consent of the publisher. The information contained herein is for the personal use of the reader and may not be incorporated in any commercial programs, other books, databases, or any kind of software or any kind of electronic media including, but not limited to, any type of digital storage mechanism without written consent of the publisher or authors. Making copies of this material or any portion for any purpose other than your own is a violation of United States copyright laws. The College for Financial Planning does not certify individuals to use the CFP, CERTIFIED FINANCIAL PLANNER, and CFP (with flame logo) marks. CFP certification is granted solely by Certified Financial Planner Board of Standards, Inc. to individuals who, in addition to completing an educational requirement such as this CFP Board-Registered Program, have met its ethics, experience, and examination requirements. Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP, CERTIFIED FINANCIAL PLANNER, and federally registered CFP (with flame logo), which it awards to individuals who successfully complete initial and ongoing certification requirements. At the College s discretion, news, updates, and information regarding changes/updates to courses or programs may be posted to the College s website at or you may call the Student Services Center at

3 Table of Contents Introduction... 1 True/False Statements... 3 Module Module 1 Answers... 7 Module Module 2 Answers Module Module 4 Answers Module Module 5 Answers Module Module 6 Answers Module Module 7 Answers Module Module 8 Answers Module Module 9 Answers Module Module 10 Answers Multiple-Choice Questions Module Module Module Module Module Module Module Module

4 Module Answers to Multiple-Choice Questions Financial Planning Process & Insurance Final Review Final Review Questions Final Review Answers

5 Introduction This Instructor Guide review now contains the end-of-class, multiplechoice practice exam, as well as true/false questions for every module. Please contact Michael Cates with any questions you may have: Jason G. Hovde, MBA, CFP Senior Director of Certification Programs College for Financial Planning 9000 East Nichols Avenue, Suite 200 Centennial, CO Introduction 1

6 2 Financial Planning Process & Insurance

7 True/False Statements Module 1 T F 1. The initial step in the financial planning process is gathering comprehensive data on each new client. T F 2. The financial planning process must follow the prescribed order, with no steps taking place at the same time as any other step in the process. T F 3. A cash flow statement shows income and expenses over a specified period of time. T F 4. For long-term success, planners generally recommend that individuals invest or save at least 15% of their gross income. T F 5. Family budgets are created to make sure that only planned expenses are incurred. T F 6. Special goals, such as early retirement or travel, must, by necessity, remain nebulous in the financial planning process. T F 7. Buying a home rather than renting is always a better choice, because homes always increase in value. T F 8. One of the most important areas a financial planner must deal with in divorce-related planning is that of child custody. T F 9. Opportunity funds and emergency funds use all of the same investment vehicles. T F 10. In the data gathering step of the financial planning process, a client survey form is completed. T F 11. Two tasks of the data gathering stage are reviewing client information and conducting an initial implementation meeting. True/False Statements 3

8 T F 12. Two tasks of the gathering client data, including goals step are quantifying goals in terms of measurable objectives and ranking objectives in order of priority. T F 13. In step three analyzing and evaluating the client s financial status appropriate techniques for achieving client objectives are selected. T F 14. Two tasks of the analyzing and evaluating the client s financial status step are reviewing relevant legal papers and contracts and presenting financial planning strategies to the client. T F 15. In step four developing and presenting financial planning recommendations and/or alternatives the financial planner evaluates the general economic environment, selects alternative products, and follows the performance of each. T F 16. In step five implementing the financial planning recommendations the financial planner assists the client in acting on the recommendations and identifies existing or potential problems in the client s situation. T F 17. Two tasks of the implementing the financial planning recommendations step are using the assistance of other professionals, as needed, and providing the client with ideas for implementing the recommendations. T F 18. In step six monitoring the financial planning recommendations the financial planner establishes a system for plan review and revision to update it for changes in the client s situation. T F 19. Two tasks of the monitoring the financial planning recommendations step are periodically reviewing the implemented recommendations with the client and reassessing the client s objectives. 4 Financial Planning Process & Insurance

9 T F 20. A financial planner gathers information on titling of assets in part because this may reveal estate distribution of property. T F 21. A financial planner gathers information on the client s other financial advisors to determine where advice has been obtained in the past. T F 22. The cash/cash equivalents section of a statement of financial position would include vested pension benefits. T F 23. The invested assets section of a statement of financial position would include the purchase price of bonds. T F 24. The general rule for the inclusion of assets on the statement of financial position is to show them at their original cost. T F 25. The inflows section of a cash flow statement could include a category for investment inflows. T F 26. A mortgage note payment would normally be classified as a fixed expense in a cash flow statement. T F 27. Savings and investment outflows would normally be classified as a variable expense on a cash flow statement. T F 28. An emergency fund should contain two months expenses in liquid form. T F 29. Money market accounts and funds and savings accounts are appropriate to use in establishing an emergency fund. T F 30. A person with many sources of stable income usually is in a better position financially than a person with only one, or a few, sources of income. T F 31. Individuals generally should save 3% to 5% of their income on an ongoing basis. T F 32. A long credit card grace period is preferable to a short one. True/False Statements 5

10 T F 33. A graduated payment mortgage entails making higher payments for a period of time, then lower payments for the duration of the mortgage term. T F 34. A reverse mortgage is one means of accessing home equity. T F 35. A budget is unnecessary if the client s economic situation is complex. T F 36. A disadvantage of budgeting is that it may discourage flexibility. T F 37. The period of time for which a budget is established must be short enough to minimize guesswork but long enough to support a consistent investment strategy. T F 38. Interest earnings on assets held in a minor s trust generally are exempt from the kiddie tax. T F 39. Custodial accounts generally involve high administrative costs. T F 40. Pell grants are available to graduate and undergraduate students. T F 41. Perkins loans are made available on the basis of financial need. T F 42. Monthly cash flow is the primary determinant in the lease or buy decision. 6 Financial Planning Process & Insurance

11 Module 1 Answers False 1. The initial step in the financial planning process is gathering comprehensive data on each new client. Rationale: The initial step in the financial planning process is establishing and defining the client-planner relationship. False 2. The financial planning process must follow the prescribed order, with no steps taking place at the same time as any other step in the process. Rationale: The steps in the process guide a planner regarding what must be done in a financial planning relationship. However, it is possible, and probable, that more than one step may happen in a single meeting with a client. True 3. A cash flow statement shows income and expenses over a specified period of time. False 4. For long-term success, planners generally recommend that individuals invest or save at least 15% of their gross income. Rationale: Planners generally recommend that clients save or invest from 5% to 10% of their gross income. False 5. Family budgets are created to make sure that only planned expenses are incurred. Rationale: Family budgets are created to provide a guideline for effective money management. They are to be kept flexible. True/False Statements 7

12 False 6. Special goals, such as early retirement or travel, must, by necessity, remain nebulous in the financial planning process. Rationale: It is impossible to plan for nebulous goals. For example, a client who wants to retire early or to travel must establish dollar amounts and time frames so that the financial plan can be set up to meet these goals. False 7. Buying a home rather than renting is always a better choice, because homes always increase in value. Rationale: Homes do not always increase in value. Because of changing demographics, homes may decrease in value, and changes in the economy may cause housing prices to stagnate or drop. If one does not expect to stay in the same locale for more than a few years, renting may make more sense. False 8. One of the most important areas a financial planner must deal with in divorce-related planning is that of child custody. Rationale: Of all the areas in which a planner may be involved in divorce planning, child custody is clearly outside the scope of his or her expertise. However, the planner should be involved in adapting the client s financial plan to provide for child support. False 9. Opportunity funds and emergency funds use all of the same investment vehicles. Rationale: Opportunity funds are typically invested in anything that is appropriate for emergency funds, but they are also invested in semiliquid investments. True 10. In the data gathering step of the financial planning process, a client survey form is completed. 8 Financial Planning Process & Insurance

13 False 11. Two tasks of the data gathering stage are reviewing client information and conducting an initial implementation meeting. Rationale: Client information is reviewed in step three; implementing the planning recommendations is step five. True False 12. Two tasks of the gathering client data, including goals step are quantifying goals in terms of measurable objectives and ranking objectives in order of priority. 13. In step three analyzing and evaluating the client s financial status appropriate techniques for achieving client objectives are selected. Rationale: Selection of appropriate techniques is a task of step four. False 14. Two tasks of the analyzing and evaluating the client s financial status step are reviewing relevant legal papers and contracts and presenting financial planning strategies to the client. Rationale: Presenting strategies to the client is a task of step four. False 15. In step four developing and presenting financial planning recommendations and/or alternatives the financial planner evaluates the general economic environment, selects alternative products, and follows the performance of each. Rationale: Evaluating the economic environment is a task of step three; following performance of products is a task of step six. True/False Statements 9

14 False 16. In step five implementing the financial planning recommendations the financial planner assists the client in acting on the recommendations and identifies existing or potential problems in the client s situation. Rationale: Identifying problems in the client s situation is a task of step three. True True True True True False 17. Two tasks of the implementing the financial planning recommendations step are using the assistance of other professionals, as needed, and providing the client with ideas for implementing the recommendations. 18. In step six monitoring the financial planning recommendations the financial planner establishes a system for plan review and revision to update it for changes in the client s situation. 19. Two tasks of the monitoring the financial planning recommendations step are periodically reviewing the implemented recommendations with the client and reassessing the client s objectives. 20. A financial planner gathers information on titling of assets in part because this may reveal estate distribution of property. 21. A financial planner gathers information on the client s other financial advisors to determine where advice has been obtained in the past. 22. The cash/cash equivalents section of a statement of financial position would include vested pension benefits. Rationale: Vested pension benefits would be included as invested assets. 10 Financial Planning Process & Insurance

15 False 23. The invested assets section of a statement of financial position would include the purchase price of bonds. Rationale: It would include the current market value of the bonds. False 24. The general rule for the inclusion of assets on the statement of financial position is to show them at their original cost. Rationale: Assets should be shown at their fair market value unless there is a good reason to do otherwise. True True False 25. The inflows section of a cash flow statement could include a category for investment inflows. 26. A mortgage note payment would normally be classified as a fixed expense in a cash flow statement. 27. Savings and investment outflows would normally be classified as a variable expense on a cash flow statement. Rationale: Savings and investments should be a separate category to reinforce the need to pay one s self first. False 28. An emergency fund should contain two months expenses in liquid form. Rationale: An emergency fund generally should contain three to six months expenses. True True 29. Money market accounts and funds and savings accounts are appropriate to use in establishing an emergency fund. 30. A person with many sources of stable income usually is in a better position financially than a person with only one, or a few, sources of income. True/False Statements 11

16 False 31. Individuals generally should save 3% to 5% of their income on an ongoing basis. Rationale: Individuals generally should save at least 5% to 10% of their income. Depending on financial goals, greater savings may be required. True False 32. A long credit card grace period is preferable to a short one. 33. A graduated payment mortgage entails making higher payments for a period of time, then lower payments for the duration of the mortgage term. Rationale: A graduated payment mortgage entails making lower payments for a period of time, but these payments increase later. True False 34. A reverse mortgage is one means of accessing home equity. 35. A budget is unnecessary if the client s economic situation is complex. Rationale: Budgeting is helpful for clients with complex economic situations. True True False 36. A disadvantage of budgeting is that it may discourage flexibility. 37. The period of time for which a budget is established must be short enough to minimize guesswork but long enough to support a consistent investment strategy. 38. Interest earnings on assets held in a minor s trust generally are exempt from the kiddie tax. Rationale: Any unearned income in a 2503(c) minor s trust is subject to the kiddie tax rules. 12 Financial Planning Process & Insurance

17 False 39. Custodial accounts generally involve high administrative costs. Rationale: Generally, administrative costs for custodial accounts are nonexistent. False 40. Pell grants are available to graduate and undergraduate students. Rationale: Pell grants are available only to undergraduate students. True False 41. Perkins loans are made available on the basis of financial need. 42. Monthly cash flow is the primary determinant in the lease or buy decision. Rationale: Cash flow is only one factor in the decision; overall cost (based on many factors), tax bracket, and length of possession all contribute to the decision. True/False Statements 13

18 Module 2 T F 1. The Investment Advisers Act of 1940 applies to persons who sell securities. T F 2. NASD Notices to Members and are applicable to insider trading. T F 3. The U.S. Supreme Court, as well as the SEC, has ruled that an investment adviser is a fiduciary with respect to his or her clients. T F 4. A registered investment adviser does not have to disclose to clients limitations in the scope of his or her recommendations and any ties with broker/dealer firms. T F 5. The Investment Advisers Act of 1940 definition of a security is confined to stock, bonds, and certificates of deposit. T F 6. Just because someone holds himself or herself out as an investment adviser or as one who provides investment advice does not mean that he or she is required to register as an investment adviser. T F 7. Anyone who meets the three-pronged test must register with the SEC. T F 8. Lawyers, accountants, engineers, or teachers whose advice is solely incidental to the practice of their respective professions qualify for an exemption from registration as an investment adviser. T F 9. Those who qualify under one of the six exceptions to the investment adviser registration requirements are not considered advisers and, therefore, do not have to comply with the antifraud provisions of the 1940 Act. T F 10. Form ADV, Part II, is required to disclose whether the adviser has any felony convictions or specified types of current injunctions. 14 Financial Planning Process & Insurance

19 T F 11. Form U-4 must be submitted on behalf of every IAR seeking to be employed by the IA. T F 12. A registered investment adviser may refer to himself or herself as an RIA. T F 13. A registered investment adviser may fulfill the brochure rule by providing clients and prospective clients with a copy of his or her Form ADV, Part II, or a separate narrative statement containing all the entries that appear on Part II. T F 14. Advisers who have less than $25 million under management, and are therefore required to register with their respective states, are still subject to SEC jurisdiction for antifraud violations. T F 15. For a willful violation of the 1940 Act, the SEC may impose fines of up to $25,000 and/or imprisonment of up to 10 years. T F 16. SEC rulings IA 770 and IA 1092 have the force of law. T F 17. To maintain more control over their representatives, large organizations become registered investment advisers rather than having each individual adviser in the organization register independently. T F 18. If an individual needs to register as an investment adviser, it is generally preferable to register as an individual rather than set up some other form of business, such as a corporation or limited liability company. T F 19. If an adviser has fewer than 12 clients in a state that is not his or her state of business, there is no need to register in that state. T F 20. Whenever an investment adviser who is also a registered representative with a securities broker/dealer provides any advice regarding investments that are not offered by his or her broker/dealer, he or she needs to obtain the broker/dealer s approval in each and every case. True/False Statements 15

20 T F 21. A person who is registered with FINRA to sell securities is exempt from registering as an investment adviser. T F 22. Before 1981, anyone who wanted to sell securities had to meet the standards of the state in which he or she wanted to sell, and there were no consistent national standards. T F 23. It is acceptable under the Investment Advisers Act of 1940 to accept both fees and commissions from clients. T F 24. If an adviser collects both fees and commissions from a client, and does not point out that he or she is able to sell only products that are offered by his or her broker/dealer, the adviser may be in violation of the antifraud provisions of the Investment Advisers Act of T F 25. If an adviser normally charges a fee for advice but waives it if a client purchases insurance or securities from the adviser, the adviser is guilty of rebating. This is generally considered to be unethical, and it is illegal in most states. T F 26. If a financial planner who is not a licensed lawyer helps a client fill in blank forms designed to create a will or trust, the planner may be guilty of practicing law without a license. T F 27. Principles and rules embodied in codes of ethics have the force of law. T F 28. Steve Maloski recommends a specific investment strategy for a client. He knows that it is not the best one for the client, but it is a good strategy, and he will make more money by having the client implement it. In this case, Steve has violated his fiduciary duty to the client. T F 29. Conflicts of interest to which a financial planner may be subject can be overcome by full disclosure to the client. 16 Financial Planning Process & Insurance

21 T F 30. New York Stock Exchange Rule 405 (the know your customer rule) requires a registered representative to meet with each client and get to know him or her on a personal basis. T F 31. If financial planners do not have expertise in a particular area of financial planning, they should nevertheless provide service in that area within the limits of their expertise. T F 32. After initial qualification as a financial planner, there is no continuing obligation to keep reasonably abreast of current practice and information in the field. T F 33. CFP Board of Standards practice standard requires the scope of the financial services engagement to be in writing. T F 34. Under Practice Standard 200 2, if a practitioner is unable to obtain sufficient and relevant quantitative information and documents to form a basis for recommendations, he or she should refuse to provide the requested services. T F 35. Practice Standard deals primarily with gathering quantitative information and documents from clients. T F 36. Practice Standard states that a planner may not use any assumptions when analyzing client data. True/False Statements 17

22 Module 2 Answers False 1. The Investment Advisers Act of 1940 applies to persons who sell securities. Rationale: The Investment Advisers Act of 1940 applies to persons who give investment advice. Persons who sell securities must register with the NASD. False 2. NASD Notices to Members and are applicable to insider trading. Rationale: NASD Notices to Members and are applicable to selling away. True 3. The U.S. Supreme Court, as well as the SEC, has ruled that an investment adviser is a fiduciary with respect to his or her clients. False 4. A registered investment adviser does not have to disclose to clients limitations in the scope of his or her recommendations and any ties with broker/dealer firms. Rationale: SEC Release IA 1092 specifically requires such disclosure. False 5. The Investment Advisers Act of 1940 definition of a security is confined to stock, bonds, and certificates of deposit. Rationale: A security is defined by the Act in very broad terms and includes many other types of investments. False 6. Just because someone holds himself or herself out as an investment adviser or as one who provides investment advice does not mean that he or she is required to register as an investment adviser. Rationale: Generally, any person holding himself or herself out as an investment adviser or as one who provides investment advice would be required to register as an investment adviser. 18 Financial Planning Process & Insurance

23 False 7. Anyone who meets the three-pronged test must register with the SEC. Rationale: Prior to the National Securities Markets Improvement Act of 1996, this was true. The 1996 Act established rules for where an adviser needs to register. False 8. Lawyers, accountants, engineers, or teachers whose advice is solely incidental to the practice of their respective professions qualify for an exemption from registration as an investment adviser. Rationale: These groups of professionals are one of the six exceptions to the investment adviser requirement not one of the exemptions. True 9. Those who qualify under one of the six exceptions to the investment adviser registration requirements are not considered advisers and, therefore, do not have to comply with the antifraud provisions of the 1940 Act. False 10. Form ADV, Part II, is required to disclose whether the adviser has any felony convictions or specified types of current injunctions. Rationale: This information is required by Form ADV, Part I. True False 11. Form U-4 must be submitted on behalf of every IAR seeking to be employed by the IA. 12. A registered investment adviser may refer to himself or herself as an RIA. Rationale: Use of RIA is specifically prohibited by SEC rules. True 13. A registered investment adviser may fulfill the brochure rule by providing clients and prospective clients with a copy of his or her Form ADV, Part II, or a separate narrative statement containing all the entries that appear on Part II. True/False Statements 19

24 True False 14. Advisers who have less than $25 million under management, and are therefore required to register with their respective states, are still subject to SEC jurisdiction for antifraud violations. 15. For a willful violation of the 1940 Act, the SEC may impose fines of up to $25,000 and/or imprisonment of up to 10 years. Rationale: For a willful violation of the 1940 Act (as amended), the SEC may impose fines of up to $10,000 and/or imprisonment of up to five years. False 16. SEC rulings IA 770 and IA 1092 have the force of law. Rationale: These rulings do not have the force of law, but they do indicate the thinking of the SEC. True False 17. To maintain more control over their representatives, large organizations become registered investment advisers rather than having each individual adviser in the organization register independently. 18. If an individual needs to register as an investment adviser, it is generally preferable to register as an individual rather than set up some other form of business, such as a corporation or limited liability company. Rationale: Because audited financial statements may be required and because of potential conflicts of interest, most individuals would be better off operating as a registered investment adviser through a business entity such as a corporation or an LLC rather than maintaining a sole proprietorship. False 19. If an adviser has fewer than 12 clients in a state that is not his or her state of business, there is no need to register in that state. Rationale: If an adviser has fewer than five clients in a state that is not his or her state of business, there is no need to register in that state. 20 Financial Planning Process & Insurance

25 True False 20. Whenever an investment adviser who is also a registered representative with a securities broker/dealer provides any advice regarding investments that are not offered by his or her broker/dealer, he or she needs to obtain the broker/dealer s approval in each and every case. 21. A person who is registered with FINRA to sell securities is exempt from registering as an investment adviser. Rationale: Registration with FINRA permits an individual to sell securities. Whether he or she has to register as an investment adviser depends on whether they meet the three-pronged test or can rely on one of the exceptions or exemptions. True 22. Before 1981, anyone who wanted to sell securities had to meet the standards of the state in which he or she wanted to sell, and there were no consistent national standards. True 23. It is acceptable under the Investment Advisers Act of 1940 to accept both fees and commissions from clients. True True True 24. If an adviser collects both fees and commissions from a client, and does not point out that he or she is able to sell only products that are offered by his or her broker/dealer, the adviser may be in violation of the antifraud provisions of the Investment Advisers Act of If an adviser normally charges a fee for advice but waives it if a client purchases insurance or securities from the adviser, the adviser is guilty of rebating. This is generally considered to be unethical, and it is illegal in most states. 26. If a financial planner who is not a licensed lawyer helps a client fill in blank forms designed to create a will or trust, the planner may be guilty of practicing law without a license. True/False Statements 21

26 False True True False False False 27. Principles and rules embodied in codes of ethics have the force of law. Rationale: Codes of ethics often are based on laws, but they are not laws themselves. Failure to abide by a code of ethics is not a violation of law. 28. Steve Maloski recommends a specific investment strategy for a client. He knows that it is not the best one for the client, but it is a good strategy, and he will make more money by having the client implement it. In this case, Steve has violated his fiduciary duty to the client. 29. Conflicts of interest to which a financial planner may be subject can be overcome by full disclosure to the client. 30. New York Stock Exchange Rule 405 (the know your customer rule) requires a registered representative to meet with each client and get to know him or her on a personal basis. Rationale: Rule 405 requires a registered representative to gather essential information to have reasonable grounds for believing that a particular investment recommendation is suitable for the client, in terms of the client s overall financial situation, investment objectives, and risk tolerance level. The requirement far exceeds simply meeting with the client to get to know him or her on a personal basis. 31. If financial planners do not have expertise in a particular area of financial planning, they should nevertheless provide service in that area within the limits of their expertise. Rationale: A financial planner must be aware of his or her limitations and has an affirmative duty to consult with those who have the requisite expertise. 32. After initial qualification as a financial planner, there is no continuing obligation to keep reasonably abreast of current practice and information in the field. Rationale: Financial planners have a duty to keep current on how financial services industry changes may affect recommendations made to clients. 22 Financial Planning Process & Insurance

27 False 33. CFP Board of Standards Practice Standard requires the scope of the financial services engagement to be in writing. Rationale: Practice Standard does not require the scope of the engagement to be in writing but acknowledges that certain disclosures to the client may be required to be in writing. False 34. Under Practice Standard 200 2, if a practitioner is unable to obtain sufficient and relevant quantitative information and documents to form a basis for recommendations, he or she should refuse to provide the requested services. Rationale: In this situation, a practitioner should either (1) restrict the scope of the engagement to those matters for which sufficient and relevant information is available or (2) terminate the engagement. False 35. Practice Standard deals primarily with gathering quantitative information and documents from clients. Rationale: Practice Standard deals primarily with mutually defining a client s personal and financial goals, needs, and priorities. False 36. Practice Standard states that a planner may not use any assumptions when analyzing client data. Rationale: Practice Standard states that the planner will use assumptions in at least two mutually agreed upon areas: the areas of personal and economic considerations. True/False Statements 23

28 Module 4 T F 1. General agents are independent businesspeople empowered by the life insurance company they represent to sell the products of the company in specified territories and to appoint agents to do business under their supervision. T F 2. The independent agent usually affiliates himself or herself with only one particular company. T F 3. Career agents must earn a minimum level of commissions to maintain their career agent contracts. T F 4. An insurance broker is the agent of the insurance company. T F 5. Generally, an insurance broker cannot bind the insurer and, therefore, a premium payment made to a broker is not payment to the insurer. T F 6. Insurers are not legally liable for the acts of their agents performing their duties, even if agents make fraudulent statements unknown to or unauthorized by the insurers. T F 7. Even though an insurance agent has only apparent authority, any acts by the agent would bind the insurer. T F 8. An insurance producer is different than an insurance agent or broker. T F 9. The initial notice of loss that is required when there is an insurance claim must always be in writing. T F 10. Once an individual has submitted the required proof of loss statement, he or she does not have to do anything else the insurance company requests. T F 11. Although both processes are similar, there are differences in the duties of the insured and insurer when a loss arises. 24 Financial Planning Process & Insurance

29 T F 12. If an insured loses one of a pair of expensive diamond earrings, the insurance company may choose to replace that one earring rather than pay for a new pair. T F 13. Under a commercial property insurance coinsurance provision, the insurer will pay the greater of (1) the replacement cost of the damaged part of the property or (2) the amount determined by use of a coinsurance formula. T F 14. The concept of insurance requires that every insured share the burden of the few who suffer losses. T F 15. The term coinsurance is applied uniformly in all types of insurance. T F 16. Subrogation permits the insured to collect twice for the same loss if he or she is fortunate enough to have duplicate insurance coverage. T F 17. If a financial planner is involved in the process of insurance needs analysis, there is seldom a need to involve an insurance agent when choosing the type of insurance to be purchased or the company from which it should be purchased. T F 18. If a consumer employs a competent insurance agent, it is not necessary to read and understand the insurance contract, which is often very complex. T F 19. If an insurance company has any of the NAIC s 12 financial ratios outside the usual range, it is put on the NAIC s Watchlist. T F 20. The RBC Ratios adjust an insurance company s assets to reflect the risk associated with the various assets. T F 21. The two primary forms of ownership of insurance companies are mutual companies and stock companies. True/False Statements 25

30 T F 22. The purpose of the Life Insurance Policy Illustration Model Law is to give guidance to graphic illustrators in preparing graphic illustrations of life insurance policies. T F 23. The McCarran Ferguson Act provides primarily for federal regulation of the insurance industry. T F 24. The regulatory authority of the Securities and Exchange Commission extends to variable life insurance products. T F 25. Under HIPAA, a medical condition cannot be excluded as a preexisting condition. T F 26. The National Association of Insurance Commissioners (NAIC) passes laws that are imposed on the states. 26 Financial Planning Process & Insurance

31 Module 4 Answers True 1. General agents are independent businesspeople empowered by the life insurance company they represent to sell the products of the company in specified territories and to appoint agents to do business under their supervision. False 2. The independent agent usually affiliates himself or herself with only one particular company. Rationale: The independent agent usually does not affiliate himself or herself with only one particular company, although it is not uncommon for the agent to favor one company. True 3. Career agents must earn a minimum level of commissions to maintain their career agent contracts. False 4. An insurance broker is the agent of the insurance company. Rationale: An insurance broker is the agent of the insurance buyer. True 5. Generally, an insurance broker cannot bind the insurer and, therefore, a premium payment made to a broker is not payment to the insurer. False 6. Insurers are not legally liable for the acts of their agents performing their duties, even if agents make fraudulent statements unknown to or unauthorized by the insurers. Rationale: Insurers are legally liable for the acts of their agents performing their duties, even if agents make fraudulent statements unknown to or unauthorized by the insurers. True 7. Even though an insurance agent has only apparent authority, any acts by the agent would bind the insurer. True/False Statements 27

32 False 8. An insurance producer is different than an insurance agent or broker. Rationale: In those states that have producers licenses, there is no difference between any of the producers. All insurance salespeople are considered to be agents. False 9. The initial notice of loss that is required when there is an insurance claim must always be in writing. Rationale: The initial notice of loss for most property claims is often done with a phone call. False 10. Once an individual has submitted the required proof of loss statement, he or she does not have to do anything else the insurance company requests. Rationale: The insured is required to assist and cooperate with the insurance company during the adjustment process. True True False 11. Although both processes are similar, there are differences in the duties of the insured and insurer when a loss arises. 12. If an insured loses one of a pair of expensive diamond earrings, the insurance company may choose to replace that one earring rather than pay for a new pair. 13. Under a commercial property insurance coinsurance provision, the insurer will pay the greater of (1) the replacement cost of the damaged part of the property or (2) the amount determined by use of a coinsurance formula. Rationale: The insurer will pay the greater of (1) the actual cash value of the damaged part of the property or (2) the amount determined by use of a coinsurance formula. True 14. The concept of insurance requires that every insured share the burden of the few who suffer losses. 28 Financial Planning Process & Insurance

33 False 15. The term coinsurance is applied uniformly in all types of insurance. Rationale: The term coinsurance has an entirely different meaning when it is used in property insurance than when it is used in indemnity-type health insurance. False 16. Subrogation permits the insured to collect twice for the same loss if he or she is fortunate enough to have duplicate insurance coverage. Rationale: Subrogation precludes the insured from collecting twice for the same loss. False 17. If a financial planner is involved in the process of insurance needs analysis, there is seldom a need to involve an insurance agent when choosing the type of insurance to be purchased or the company from which it should be purchased. Rationale: If insurance is not an area of specialization for a planner, it makes sense to seek the opinion of an expert insurance agent. False 18. If a consumer employs a competent insurance agent, it is not necessary to read and understand the insurance contract, which is often very complex. Rationale: An insurance consumer should read and understand the insurance contract. False 19. If an insurance company has any of the NAIC s 12 financial ratios outside the usual range, it is put on the NAIC s Watchlist. Rationale: If an insurance company has four of the 12 ratios outside the usual ranges, it is put on the NAIC s Watchlist. True/False Statements 29

34 True True False 20. The RBC Ratios adjust an insurance company s assets to reflect the risk associated with the various assets. 21. The two primary forms of ownership of insurance companies are mutual companies and stock companies. 22. The purpose of the Life Insurance Policy Illustration Model Law is to give guidance to graphic illustrators in preparing graphic illustrations of life insurance policies. Rationale: The purpose of this model law is to define and limit how an insurance company may illustrate life insurance policy values to potential insureds. False 23. The McCarran Ferguson Act provides primarily for federal regulation of the insurance industry. Rationale: The McCarran Ferguson Act provides primarily for state regulation of the insurance industry. True False 24. The regulatory authority of the Securities and Exchange Commission extends to variable life insurance products. 25. Under HIPAA, a medical condition cannot be excluded as a preexisting condition. Rationale: HIPAA regulates the application of preexisting conditions, but it does not eliminate them. False 26. The National Association of Insurance Commissioners (NAIC) passes laws that are imposed on the states. Rationale: The NAIC creates model laws that it encourages the states to adopt. 30 Financial Planning Process & Insurance

35 Module 5 T F 1. Risk management is best conducted using a set process because it reduces the likelihood of being sidetracked and missing important points. T F 2. Before developing a risk management program for a client, the planner should determine clearly defined objectives. T F 3. The planner should obtain all of the client s risk management data through the use of data survey forms and insurance checklists. T F 4. After the planner has provided the client with a comprehensive risk management plan, the client is poorly served unless the plan is implemented. T F 5. In deciding whether to insure a potential loss, the planner needs to consider the likelihood of the loss occurring. T F 6. Actuaries perform risk analysis and determine premium amounts by ascertaining if the elements of an insurable risk are present and if adverse selection is controllable. T F 7. Insurance is used to transfer the risk of loss to a group, each member of which faces the same potential loss and none of whom wants the loss to happen. T F 8. Adverse selection is the process of picking only the best risks. T F 9. Postselection underwriting is when the insurer reviews the insured s actions, risk factors, and claims history after the policy has been in effect for a period of time to determine whether to continue providing coverage or cancel it. T F 10. A variation of risk reduction is risk sharing that involves forming a business entity in which the potential loss is limited to the amount invested in the business. True/False Statements 31

36 T F 11. In spite of the financial danger involved in absorbing unexpectedly large losses, firms that employ self-insurance usually do not retain commercial coverage to cover losses above a certain dollar amount. T F 12. A company using a self-insured plan can exclude certain benefits that may not be excluded from an insured plan. T F 13. Forming a purchasing group guarantees lower fees and increases the availability of insurance. T F 14. Torts are always intentional. T F 15. While acting irresponsibly may invite liability, acting responsibly will prevent it. T F 16. All risk treatment devices, including insurance, should be viewed as tools that are only appropriate or inappropriate in a particular situation. T F 17. In order to help a client with his or her risk management plan, a planner should know not only what kind of work a client does, but what the client does when not at work. T F 18. A contract in which one of the parties is incompetent may be voided by either party. T F 19. An implied contract arises when a member of the public reasonably believes that a person has the authority or knowledge to act in a certain manner. T F 20. The doctrine of absolute liability holds an individual or company responsible only where there is fault or negligence. T F 21. When a planner fails to conduct himself or herself in a professional manner and causes harm to a client, one of the elements that must be present in order for the planner to be considered negligent is a causal connection between the action and the resulting harm. 32 Financial Planning Process & Insurance

37 T F 22. Exercising due diligence or due care will help protect the planner from client accusations that he or she was negligent in recommending a particular product or plan of action. T F 23. The parol evidence rule applies to subsequent modifications after an agreement is in written form. T F 24. The doctrine of estoppel prevents a party from asserting a right to which he or she would otherwise be entitled where, because of his or her own actions or behavior, he or she misled someone (even though unintentionally) who relied on the understanding created thereby to his or her own detriment. T F 25. Rescission of a contract means that it is null from the point that it is rescinded. T F 26. Insurance policies are contracts of adhesion, which means that they are freely negotiated between the parties. T F 27. An aleatory contract is one where the outcome is controlled by chance, and the dollars that change hands are generally of substantially unequal amounts. T F 28. Because there are two parties to an insurance contract (the insurer and the insured), insurance contracts are said to be bilateral contracts. T F 29. The declarations section of an insurance policy includes information provided by the applicant. True/False Statements 33

38 Module 5 Answers True 1. Risk management is best conducted using a set process because it reduces the likelihood of being sidetracked and missing important points. False 2. Before developing a risk management program for a client, the planner should determine clearly defined objectives. Rationale: Objectives of any risk management program must come from the client, (perhaps working with the planner), but not just the planner. False 3. The planner should obtain all of the client s risk management data through the use of data survey forms and insurance checklists. Rationale: The planner should also refer to (and see) relevant documents such as tax returns, brokerage statements, insurance policies, wills, and trust documents. True 4. After the planner has provided the client with a comprehensive risk management plan, the client is poorly served unless the plan is implemented. True 5. In deciding whether to insure a potential loss, the planner needs to consider the likelihood of the loss occurring. True 6. Actuaries perform risk analysis and determine premium amounts by ascertaining if the elements of an insurable risk are present and if adverse selection is controllable. True 7. Insurance is used to transfer the risk of loss to a group, each member of which faces the same potential loss and none of whom wants the loss to happen. False 8. Adverse selection is the process of picking only the best risks. Rationale: Adverse selection is having a pool of insureds skewed toward those who represent higher risk. 34 Financial Planning Process & Insurance

39 True 9. Postselection underwriting is when the insurer reviews the insured s actions, risk factors, and claims history after the policy has been in effect for a period of time to determine whether to continue providing coverage or cancel it. True False 10. A variation of risk reduction is risk sharing that involves forming a business entity in which the potential loss is limited to the amount invested in the business. 11. In spite of the financial danger involved in absorbing unexpectedly large losses, firms that employ self-insurance usually do not retain commercial coverage to cover losses above a certain dollar amount. Rationale: Such firms usually do retain some form of commercial coverage to cover losses above a certain dollar amount. True False 12. A company using a self-insured plan can exclude certain benefits that may not be excluded from an insured plan. 13. Forming a purchasing group guarantees lower fees and increases the availability of insurance. Rationale: Forming a purchasing group does not guarantee lower fees, but it may increase the availability of insurance. False 14. Torts are always intentional. Rationale: A tort may be either intentional or unintentional. False 15. While acting irresponsibly may invite liability, acting responsibly will prevent it. Rationale: Acting responsibly will not necessarily prevent liability. True 16. All risk treatment devices, including insurance, should be viewed as tools that are only appropriate or inappropriate in a particular situation. True/False Statements 35

40 True False 17. In order to help a client with his or her risk management plan, a planner should know not only what kind of work a client does, but what the client does when not at work. 18. A contract in which one of the parties is incompetent may be voided by either party. Rationale: If one of the parties is incompetent (such as a minor), the contract may be voided only by the incompetent party. True False 19. An implied contract arises when a member of the public reasonably believes that a person has the authority or knowledge to act in a certain manner. 20. The doctrine of absolute liability holds an individual or company responsible only where there is fault or negligence. Rationale: Under the doctrine of absolute liability, a party is held responsible even where there is no fault or negligence. True True False 21. When a planner fails to conduct himself or herself in a professional manner and causes harm to a client, one of the elements that must be present in order for the planner to be considered negligent is a causal connection between the action and the resulting harm. 22. Exercising due diligence or due care will help protect the planner from client accusations that he or she was negligent in recommending a particular product or plan of action. 23. The parol evidence rule applies to subsequent modifications after an agreement is in written form. Rationale: The parol evidence rule states that evidence whether oral or written of prior understandings will not be admitted to contradict a final, complete, written agreement (in the absence of fraud, mutual mistake, duress, or the like). 36 Financial Planning Process & Insurance