Review Questions & Answers
Financial Planning
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Table of Contents
Introduction ... 1 True/False Statements ... 3 Module 1 ... 3 Module 1 Answers ... 7 Module 2 ... 14 Module 2 Answers ... 18 Module 4 ... 24 Module 4 Answers ... 29 Module 5 ... 37 Module 5 Answers ... 40 Module 6 ... 44 Module 6 Answers ... 46 Module 7 ... 48 Module 7 Answers ... 50 Module 8 ... 53 Module 8 Answers ... 55 Module 9 ... 58 Module 9 Answers ... 60 Multiple-Choice Questions ... 62 Session 1 (Module 1) ... 62Session 2 Answers ... 68 Session 3 (Module 2) ... 70 Session 3 Answers ... 73 Session 4 (Module 3) ... 75 Session 4 Answers ... 76 Session 5 (Module 4) ... 77 Session 5 Answers ... 78 Session 6 (Module 4) ... 79 Session 6 Answers ... 82 Session 7 (Module 5) ... 84 Session 7 Answers ... 86 Session 8 (Module 5) ... 88 Session 8 Answer ... 88 Session 9 (Module 6) ... 89 Session 9 Answers ... 90 Session 10 (Module 7) ... 91 Session 10 Answers ... 93 Session 11 (Module 7) ... 95 Session 11 Answers ... 96 Session 12 (Module 8) ... 97 Session 12 Answers ... 99 Session 13 (Module 8) ... 101
Session 14 Answers ... 108
Session 15 (Module 9) ... 110
Session 15 Answers ... 111
Session 16 (Module 9) ... 112
Session 16 Answer ... 112
Financial Planning Process & Insurance Final Review ... 113
Final Review Questions ... 113
Introduction
This Instructor Guide review now contains the end-of-class, multiple-choice practice exam, as well as true/false questions for every module. Please contact Jason Hovde 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 80112
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 all inflows (referred to as income) and all outflows (referred to as 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.
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.
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 5% to 10% of their income on an ongoing basis.
T F 32. A long credit card grace period is preferable to a short one. 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 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. A critical component of budgeting is planning for expenses, such as car or home repairs, even when you don’t know that they will occur in the near future. TF 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
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. The definitions of income and expenses are broad here and not the same as used for defining income for income tax purposes. For example, a sale of an asset would be considered income even if part of it was return of principle. If the money were reinvested, it would all show as an expense in the form of savings outflow.
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; some even
recommend 20% because of the employment pattern shifting to more periods of unemployment and job changes.
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.
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. It doesn’t mean that the target amounts and time frames won’t change over time.
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.
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 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.
False 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.
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 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.
True 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.
True 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.
True 20. A financial planner gathers information on titling of assets in part
because this may reveal estate distribution of property.
True 21. A financial planner gathers information on the client’s other
financial advisors to determine where advice has been obtained in the past.
False 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 because they generally would require time to liquidate even if they are in money markets (which is unlikely).
False 23. The invested assets section of a statement of financial position
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 25. The inflows section of a cash flow statement could include a
category for investment inflows.
True 26. A mortgage note payment would normally be classified as a fixed
expense in a cash flow statement.
False 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 29. Money market accounts and funds and savings accounts are
appropriate to use in establishing an emergency fund.
True 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.
False 31. Individuals generally should save 5% to 10% of their income on
an ongoing basis.
Rationale: Individuals generally should save at least 10%
to 20% of their income. Depending on financial goals, greater savings may be required. Remember that employer matches count toward this goal.
False 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 34. A reverse mortgage is one means of accessing home equity. False 35. A budget is unnecessary if the client’s economic situation is
complex.
Rationale: Budgeting is helpful for clients with complex
economic situations.
True 36. A disadvantage of budgeting is that it may discourage flexibility. True 37. A critical component of budgeting is planning for expenses such
as car or home repairs even when you don’t know that they will occur in the near future.
False 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.
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.
False 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.
Module 2
T F 1. The Investment Advisers Act of 1940 applies to persons who sell securities.
T F 2. NASD Notices to Members 94–44 and 96–33 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.
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.
T F 21. A person who is registered with FINRA to sell securities is exempt from registering as an investment adviser.
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 1940.
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.
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 33. CFP Board of Standards practice standard 100–1 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 200–1 deals primarily with gathering quantitative information and documents from clients.
T F 36. Practice Standard 300–1 states that a planner may not use any assumptions when analyzing client data.
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 94–44 and 96–33 are applicable to insider trading.
Rationale: NASD Notices to Members 94–44 and 96–33
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.
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 11. Form U-4 must be submitted on behalf of every IAR seeking to
be employed by the IA.
False 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.
False 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 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.
False 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.
True 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
False 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 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 1940.
True 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.
True 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.
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.
True 28. Steve Maloski recommends a specific investment strategy for a
True 29. Conflicts of interest to which a financial planner may be subject
can be overcome by full disclosure to the client.
False 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.
False 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.
False 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.
False 33. CFP Board of Standards Practice Standard 100–1 requires the
scope of the financial services engagement to be in writing.
Rationale: Practice Standard 100–1 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 200–1 deals primarily with gathering
quantitative information and documents from clients.
Rationale: Practice Standard 200–1 deals primarily with
mutually defining a client’s personal and financial goals, needs, and priorities.
False 36. Practice Standard 300–1 states that a planner may not use any
assumptions when analyzing client data.
Rationale: Practice Standard 300–1 states that the planner
will use assumptions in at least two mutually agreed upon areas: the areas of personal and economic considerations.
Module 4
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 define the objectives for the client to fully cover their risks.
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 accepted by the client, 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, of which each member faces the same potential loss and none want 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.
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.
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 in 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.
T F 30. 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 31. The independent agent usually affiliates himself or herself with only one particular company.
T F 32. Career agents must earn a minimum level of commissions to maintain their career agent contracts.
T F 33. An insurance broker is the agent of the insurance company. T F 34. Generally, an insurance broker cannot bind the insurer and,
T F 35. 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 36. Even though an insurance agent has only apparent authority, any acts by the agent would bind the insurer.
T F 37. An insurance producer is different than an insurance agent or broker.
T F 38. The initial notice of loss that is required when there is an insurance claim must always be in writing.
T F 39. 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 40. Although both processes are similar, there are differences in the duties of the insured and insurer when a loss arises.
T F 41. 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 42. 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 43. The concept of insurance requires that every insured share the burden of the few who suffer losses.
T F 44. The term “coinsurance” is applied uniformly in all types of insurance.
T F 45. 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 47. 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 48. 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 49. The “RBC Ratios” adjust an insurance company’s assets to reflect
the risk associated with the various assets.
T F 50. The two primary forms of ownership of insurance companies are mutual companies and stock companies.
T F 51. 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 52. The McCarran Ferguson Act provides primarily for federal regulation of the insurance industry.
T F 53. The regulatory authority of the Securities and Exchange Commission extends to variable life insurance products. T F 54. Under HIPAA, a medical condition cannot be excluded as a
preexisting condition.
T F 55. The National Association of Insurance Commissioners (NAIC) passes laws that are imposed on the states.
Module 4 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 define the objectives for the client to fully cover their risks.
Rationale: Objectives of any risk management program
must come from the client (perhaps working with the planner), 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 and conversations with the client.
True 4. After the planner has provided the client with a comprehensive risk management plan accepted by the client, 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, of which each member faces the same potential loss and none want the loss to happen.
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 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.
False 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 12. A company using a self-insured plan can exclude certain benefits
that may not be excluded from an insured plan.
False 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 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.
False 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 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.
False 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 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.
True 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.
False 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).
True 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.
False 25. Rescission of a contract means that it is null from the point that it
is rescinded.
Rationale: Rescission of a contract means that it is null
from the beginning.
False 26. Insurance policies are contracts of adhesion, which means that
they are freely negotiated between the parties.
Rationale: A contract of adhesion is one in which one party
writes the contract and the other party either accepts it as is or rejects it.
True 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.
False 28. Because there are two parties in an insurance contract (the insurer
and the insured), insurance contracts are said to be bilateral contracts.
Rationale: An insurance contract is unilateral, not bilateral,
because only one party, the policyowner, can enforce its terms. The insurer cannot force the policyowner to pay the premium.
True 29. The declarations section of an insurance policy includes
information provided by the applicant.
True 30. 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 31. 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 32. Career agents must earn a minimum level of commissions to
maintain their career agent contracts.
False 33. An insurance broker is the agent of the insurance company. Rationale: An insurance broker is the agent of the
insurance buyer.
True 34. Generally, an insurance broker cannot bind the insurer and,
therefore, a premium payment made to a broker is not payment to the insurer.
False 35. 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 36. Even though an insurance agent has only apparent authority, any
acts by the agent would bind the insurer.
False 37. 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 38. 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 39. 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 40. Although both processes are similar, there are differences in the
duties of the insured and insurer when a loss arises.
True 41. 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.
False 42. 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 43. The concept of insurance requires that every insured share the
burden of the few who suffer losses.
False 44. 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 45. 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 46. 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 47. 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 48. 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 49. The “RBC Ratios” adjust an insurance company’s assets to reflect
the risk associated with the various assets.
True 50. The two primary forms of ownership of insurance companies are
False 51. 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 52. 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 53. The regulatory authority of the Securities and Exchange
Commission extends to variable life insurance products.
False 54. 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. The Affordable Care Act eliminated them if an individual signs up on one of the exchanges during open enrollment.
False 55. The National Association of Insurance Commissioners (NAIC)
passes laws that are imposed on the states.
Rationale: The NAIC creates model laws that it encourages
Module 5
T F 1. The benefit under a joint and survivor death benefit option is generally smaller than under a life-only option.
T F 2. Unusual expenditures made by family members after a client’s death often are referred to as adjustment funds.
T F 3. Death benefit proceeds from life insurance policies are generally taxable as regular income.
T F 4. Dividends received from participating life insurance policies are usually paid when the insurer earns more than 8% on invested policy reserves.
T F 5. Annually renewable term (ART) insurance usually has a very low premium.
T F 6. Although approximately one-third of all insurance policies sold are term, only about 5% of death claims are paid from term insurance policies.
T F 7. One distinction between universal life (UL) policies and other permanent life policies is that UL policy elements are unbundled. T F 8. Interest rates credited to current premiums on UL policies are
nearly always the same as rates credited to past premiums. T F 9. Surrender charges normally increase the longer the policyholder
holds an insurance contract.
T F 10. UL policy returns react faster than whole life policy returns when interest rates change.
T F 11. Variable universal life (VUL) policies require the policyholder to bear the risk of the underlying investment.
T F 12. The death benefit guarantee period in an adjustable life policy cannot change once the policy is issued.
T F 14. Employer-paid premiums on group life insurance policies are taxable as income to employees.
T F 15. The primary loads of life insurance products are mortality costs and acquisition and administration expenses.
T F 16. Low-load life insurance features include lower premiums and lower cash surrender values.
T F 17. For a life insurance claim to be filed, all that is required is a copy of the death certificate and a claim form signed by the
beneficiary.
T F 18. A revocable beneficiary designation ensures that the beneficiary cannot be changed without written permission.
T F 19. Lump-sum distributions are the most popular method of settlement option.
T F 20. The most common nonforfeiture option is reduced paid-up insurance.
T F 21. Under the “installments for a fixed period” settlement option, the beneficiary specifies an amount of desired income, and the insurer determines how long the payments will last.
T F 22. The life income with refund settlement option guarantees only that payments will last throughout the beneficiary’s life. T F 23. A person who elects the reduced premium dividend option will
receive a check whenever there is a policy surplus.
T F 24. Under the provisions of a disability waiver of premium rider, the policyowner will not be required to repay any premiums waived due to a qualifying disability.
T F 25. Under the provisions of the common disaster clause, if the insured and the primary beneficiary die in a common accident, the
T F 26. A deferred annuity means that the policyholder’s premium payment is deferred until three months after signing the annuity application.
T F 27. Generally, withdrawals from tax-deferred annuities prior to age 59½ will trigger an IRS-imposed 10% penalty.
T F 28. Mortality refers to life expectancy and morbidity refers to rates of disability.
T F 29. An insurance company’s dividend scale is based on its profits and surplus.
T F 30. Generally, last-to-die joint life policies have a lower lapse rate than individual policies.
T F 31. It is usually sufficient for a planner to consider only a client’s current insurance needs. Future needs should be considered in the future.
Module 5 Answers
True 1. The benefit under a joint and survivor death benefit option is generally smaller than under a life-only option.
True 2. Unusual expenditures made by family members after a client’s death often are referred to as adjustment funds.
False 3. Death benefit proceeds from life insurance policies are generally taxable as regular income.
Rationale: Death benefits from life insurance policies are
generally received income tax free.
False 4. Dividends received from participating life insurance policies are usually paid when the insurer earns more than 8% on invested policy reserves.
Rationale: Insurers normally base dividends on a part of
earnings over a very conservative interest rate, such as 3.5% per year.
True 5. Annually renewable term (ART) insurance usually has a very low premium.
True 6. Although approximately one-third of all insurance policies sold are term, only about 5% of death claims are paid from term insurance policies.
True 7. One distinction between universal life (UL) policies and other permanent life policies is that UL policy elements are unbundled.
False 8. Interest rates credited to current premiums on UL policies are nearly always the same as rates credited to past premiums.
Rationale: It is often the case that older premiums are
credited at different rates than newer premiums. The combined rate received from older and newer rates is referred to as the blended rate.
False 9. Surrender charges normally increase the longer the policyholder holds an insurance contract.
Rationale: Surrender charges decrease the longer a
contract is held. Most surrender charges have durations from 5–15 years, and they gradually decrease over those time spans.
True 10. UL policy returns react faster than whole life policy returns when
interest rates change.
True 11. Variable universal life (VUL) policies require the policyholder to
bear the risk of the underlying investment.
False 12. The death benefit guarantee period in an adjustable life policy
cannot change once the policy is issued.
Rationale: The death benefit guarantee period, cash value,
and premium are all changeable in adjustable life policies.
True 13. Joint life policies cover more than one life.
False 14. Employer-paid premiums on group life insurance policies are
taxable as income to employees.
Rationale: Premiums paid for up to $50,000 of group life
insurance are excluded from employees’ income. Employer-paid premiums for amounts over $50,000 must be included as income to employees.
True 15. The primary loads of life insurance products are mortality costs
and acquisition and administration expenses.
False 16. Low-load life insurance features include lower premiums and
lower cash surrender values.
Rationale: Although low-load policies do require lower
premiums, they feature high immediate cash surrender values. When short premium payment periods are chosen, typical cash surrender values may be 80% to 100% of the
True 17. For a life insurance claim to be filed, all that is required is a copy
of the death certificate and a claim form signed by the beneficiary.
False 18. A revocable beneficiary designation ensures that the beneficiary
cannot be changed without written permission.
Rationale: Revocable beneficiary designations can be
changed by the policyholder at will. Beneficiary
designations that require written permission for changes are termed irrevocable.
True 19. Lump-sum distributions are the most popular method of
settlement option.
False 20. The most common nonforfeiture option is reduced paid-up
insurance.
Rationale: The most common nonforfeiture option is cash.
Other common options are reduced paid-up insurance and extended term insurance.
False 21. Under the “installments for a fixed period” settlement option, the
beneficiary specifies an amount of desired income, and the insurer determines how long the payments will last.
Rationale: When a beneficiary specifies a certain amount
of income, he or she has elected the “installment of a fixed amount” settlement option. In the “installment for a fixed period option,” the beneficiary specifies the period of time over which payments are to be received.
False 22. The life income with refund settlement option guarantees only
that payments will last throughout the beneficiary’s life.
Rationale: The life income with refund settlement also
guarantees a refund if the beneficiary dies without having at least received the death benefit principal.
False 23. A person who elects the reduced premium dividend option will
receive a check whenever there is a policy surplus.
Rationale: The reduced premium dividend option will result
in the subsequent premium being reduced by the amount of the dividend credited.
True 24. Under the provisions of a disability waiver of premium rider, the
policyowner will not be required to repay any premiums waived due to a qualifying disability.
True 25. Under the provisions of the common disaster clause, if the insured
and the primary beneficiary die in a common accident, the beneficiary is presumed to have died first.
False 26. A deferred annuity means that the policyholder’s premium
payment is deferred until three months after signing the annuity application.
Rationale: A deferred annuity means that income
payments will not start until at least one year from the first premium payment.
True 27. Generally, withdrawals from tax-deferred annuities prior to age
59½ will trigger an IRS-imposed 10% penalty.
True 28. Mortality refers to life expectancy and morbidity refers to rates of
disability.
True 29. An insurance company’s dividend scale is based on its profits and
surplus.
True 30. Generally, last-to-die joint life policies have a lower lapse rate
than individual policies.
False 31. It is usually sufficient for a planner to consider only a client’s
current insurance needs. Future needs should be considered in the future.
Rationale: Planners should consider their clients’ future
insurance needs as well as their current needs. Insurance also can be used to fund education or estate needs that
Module 6
T F 1. The advantages of keeping an existing life insurance policy should be considered before replacing the policy.
T F 2. Survivors’ needs should be taken into account when considering the amount of life insurance coverage needed.
T F 3. Prior to determining an appropriate amount of life insurance coverage, a client must determine life insurance goals.
T F 4. Although a client’s life insurance “needs” should be considered when determining an appropriate amount of coverage, her “wants” should probably be ignored.
T F 5. The anticipated earnings of a surviving spouse should be considered when determining life insurance needs. T F 6. It is difficult to predict a child’s higher-education costs.
Accordingly, these costs should not be considered when determining life insurance coverage.
T F 7. An emergency fund for survivors should be equivalent to one month of their fixed and variable expenses.
T F 8. If a client can qualify for one type of insurance, he or she
generally can qualify for any type of insurance (with exceptions). T F 9. A pitfall in selecting a life insurance product is to assume that a
variable product will outperform a nonequity product.
T F 10. One effective method used to compare the costs of two policies is to determine what they cost per $1,000 of coverage.
T F 11. If the price of life insurance is roughly the same as the insurance company’s cost to pay death claims (the “raw material cost”), the insurance is reasonably priced.
T F 13. A client’s life insurance coverage should be reviewed periodically to take into account the client’s changing needs, goals, and circumstances.
T F 14. The insurance commissioners in most states actively encourage replacement of existing insurance policies.
T F 15. A consideration when determining life insurance coverage is whether the survivors want to exhaust the proceeds or preserve them.
T F 16. Term insurance is frequently the least expensive short-term solution to cover large life insurance needs.
Module 6 Answers
True 1. The advantages of keeping an existing life insurance policy should be considered before replacing the policy.
True 2. Survivors’ needs should be taken into account when considering the amount of life insurance coverage needed.
True 3. Prior to determining an appropriate amount of life insurance coverage, a client must determine life insurance goals.
False 4. Although a client’s life insurance “needs” should be considered when determining an appropriate amount of coverage, her “wants” should probably be ignored.
Rationale: A client’s “wants” are nearly as important as a
client’s “needs.” And once needs are met, wants should be given appropriate credence.
True 5. The anticipated earnings of a surviving spouse should be considered when determining life insurance needs.
False 6. It is difficult to predict a child’s higher-education costs. Accordingly, these costs should not be considered when determining life insurance coverage.
Rationale: An estimate of higher-education costs must be
made prior to determining insurance coverage. As the child gets older, higher-education costs will be easier to predict and the life insurance plan may be fine-tuned.
False 7. An emergency fund for survivors should be equivalent to one month of their fixed and variable expenses.
Rationale: An amount equivalent to three to six months of
total expenses should be set aside for an emergency fund.
