CFP EXAM CHEAT SHEET: Risk, Insurance & Investments

RISK MANAGEMENT PROCESS

5-Step Framework:

Identify risks → 2. Measure impact → 3. Evaluate alternatives → 4. Select techniques → 5. Implement & Monitor

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RISK TYPES & INSURANCE ELIGIBILITY

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Personal Risks (Pure Risk)

• Premature death | Disability (living disabled) | Longevity (outliving assets) | Health care | Unemployment

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RISK MANAGEMENT TECHNIQUES

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Key Rule: Use insurance for large, infrequent, unpredictable losses — NOT small, predictable ones.

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INSURANCE FUNDAMENTALS

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LIFE INSURANCE TYPES

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Life Insurance Needs Calculation

Human Life Value: PV of future earnings − taxes − personal expenses

Needs Approach: Identify needs (debt, income, mortgage, education) → purchase insurance to cover gap vs. existing assets

Mnemonic - DIME: Debt, Income replacement, Mortgage, Education

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DISABILITY INSURANCE

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Definition of Disability (Exam Critical)

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Residual (Partial) Disability: Proportional benefit if partially disabled.

COLA Rider: Inflation adjustment during disability — highly recommended.

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LONG-TERM CARE INSURANCE

Benefit Triggers

Pays when insured cannot perform 2 of 6 ADLs OR has severe cognitive impairment:

6 ADLs: Bathing | Dressing | Toileting | Transferring | Continence | Eating

Key Provisions

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HOMEOWNERS INSURANCE (HO Policies)

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Coinsurance Requirement

Must carry ≥80% of replacement cost to collect full partial losses

`` Reimbursement = (Insurance Carried / Insurance Required) × Loss ``

Example: $400K home, carry $240K (60% vs. 80% required = $320K needed)

• $100K loss: ($240K/$320K) × $100K = $75K (not $100K)

Exam Tip: Always insure to replacement cost, not market value; maintain ≥80%.

What's NOT Covered

• Flood (NFIP separate policy)

• Earthquake (endorsement)

• Sewer backup (endorsement)

• Business activities

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AUTO INSURANCE (Personal Auto Policy - PAP)

Six Coverages

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Risk Category	Type	Insurable?	Example
Pure	Loss or no loss only	✓ Yes	Death, disability, property damage
Speculative	Gain or loss possible	✗ No	Investments, business ventures
Technique	Use When	Example
Avoidance	Risk unacceptable; no benefit	Stop skydiving
Reduction	Frequency/severity control needed	Home security system; smoke detectors
Retention	Low severity; can absorb	High deductible; emergency fund
Transfer	Large, unpredictable loss	Insurance purchase
Sharing	Spread risk across parties	Coinsurance; partnerships
Principle	Definition	Exception
Indemnity	Restore to pre-loss position; no profit	Life insurance (pays face value)
Insurable Interest	Legal right to recover loss	Property: at time of loss; Life: at inception
Law of Large Numbers	Pooled risks → predictable losses	Enables premium pricing
Type	Premium	Cash Value	Best For
Term	Low (initially)	None	Temporary need; budget-conscious
Whole Life	High (fixed)	Yes; guaranteed growth	Permanent need; cash value priority
Universal Life (UL)	Flexible	Yes	Flexibility in premiums/death benefit
Variable Life (VL)	Fixed	Yes (market-based)	Client willing to bear investment risk
Variable Universal Life (VUL)	Flexible	Yes (market-based)	Max flexibility; investment control
Feature	Short-Term	Long-Term
Waiting Period	0–14 days	30–180 days (elimination period)
Benefit Period	Up to 2 years	To age 65 or longer
Replacement %	60–70% income	60–70% income
Definition	Coverage	Favorability
Own Occupation	Can't do YOUR job	Most favorable (expensive)
Split Definition	Own occ. 2 yrs → Any occ.	Middle ground
Any Occupation	Can't do ANY job	Least favorable (cheaper)
Provision	Exam Focus
Elimination Period	Deductible (days before benefits start): 30, 60, 90, 180 days
Benefit Period	2, 3, 5 years, or lifetime
Daily Benefit Amount	Maximum per day
COLA Rider	3–5% compound inflation (CRITICAL for healthcare cost growth)
Form	Coverage
HO-3	Open perils dwelling + named perils contents (MOST COMMON)
HO-4	Renters (contents only; open perils)
HO-5	Open perils both dwelling & contents (broadest)
HO-6	Condo owners (unit interior & personal property)
Coverage	Applies	Deductible
A — Liability	Bodily injury & property damage to others	None
B — Medical Payments	Your medical expenses regardless of fault	None
C — Uninsured/Underinsured Motorist	When