Free CFP Risk Management and Insurance Planning Practice Questions (2026)

This is a classic two-part question that tests both needs analysis and the tax rules for disability benefits. You must solve both parts correctly.

> ⚠️ Exam trap: > The most common mistake is focusing only on the numbers and ignoring the tax implications. Candidates see a $5,000/month benefit and think it's sufficient, or they miscalculate the "need" by ignoring the husband's income. The question is structured to catch those who don't read every detail.

• Step 1: Calculate the family's income gap for essential expenses.
• Essential monthly expenses: $6,500
• Husband's monthly income: $4,000
• Income gap to be covered by Sarah's disability benefits: $6,500 - $4,000 = $2,500. This is the "need" her disability income must satisfy.
• Step 2: Determine the taxability of the group LTD benefits.
• The problem states that Sarah's employer pays the premiums for the group policy.
• Per IRS rules, when an employer pays the premium for disability insurance, any benefits received by the employee are considered taxable income.
• This eliminates options A and D immediately.
• Step 3: Combine the findings.
• The income need from Sarah's benefits is $2,500 per month.
• The benefits from her existing group policy are taxable.
• This directly matches option C.

Why isn't her current $5,000 policy enough? While her gross benefit of $5,000 is more than the $2,500 need, the question asks for the need itself and the tax implication. The $2,500 is the target her benefits must hit after tax. A planner's advice would be to ensure her net benefit after taxes would be at least $2,500.

The Human Life Value (HLV) approach calculates the present value of an individual's future earnings that are dedicated to their dependents. This question requires a present value calculation of a growing ordinary annuity.

> 🧮 Formula: > The present value of a growing ordinary annuity is calculated as: > PV = PMT × [1 - ( (1+g) / (1+r) )^n] / (r - g) > Where: > PMT = First period's payment (annual contribution) > g = growth rate > r = discount rate > n = number of periods

• Step 1: Calculate the annual contribution to dependents.
• Annual income: $75,000
• Less: Personal consumption/taxes/premiums: $25,000
• Annual contribution (PMT): $50,000
• Step 2: Identify the variables for the formula.
• PMT = $50,000
• g (growth rate) = 3% or 0.03
• r (discount rate) = 6% or 0.06
• n (number of years) = 35
• Step 3: Calculate the present value.
• PV = $50,000 × [1 - ( (1.03) / (1.06) )^35] / (0.06 - 0.03)
• PV = $50,000 × [1 - (0.9717)^35] / (0.03)
• PV = $50,000 × [1 - 0.3541] / (0.03)
• PV = $50,000 × [0.6459] / (0.03)
• PV = $50,000 × 21.53
• PV = $1,076,500

This result matches option B. The calculation assumes payments occur at the end of each period (an ordinary annuity). Be aware that the exam could present a scenario implying an annuity due (payments at the beginning of the period), which would require a slightly different calculation.

This question tests your precise knowledge of the benefit requirements for a tax-qualified LTC policy under HIPAA. The distinction is critical.

• I. Inability to perform at least two ADLs: This is a primary benefit trigger. The six ADLs are bathing, dressing, eating, continence, toileting, and transferring.
• II. Severe cognitive impairment: This is the other primary benefit trigger, covering conditions like Alzheimer's that require supervision.
• III. Physician's certification for 90 days: This is a statutory co-requisite. For a policy to be tax-qualified, the insured must be certified by a licensed health care practitioner as being chronically ill, meaning the condition is expected to last at least 90 days.

The core trigger is either the ADL failure (I) OR the cognitive impairment (II). However, for a tax-qualified policy to pay benefits, that condition must ALSO be certified as lasting at least 90 days (III). Therefore, you need one of the first two conditions and the third condition to be met.

This is a direct application of the coinsurance formula, a must-know calculation for the exam. The formula penalizes policyholders for underinsuring their property.

> 💡 Worked example: > The coinsurance formula determines the payout when a property is underinsured: > Payout = (Amount of Insurance Carried / Amount of Insurance Required) × Loss > The result is capped at the policy limit.

• Step 1: Determine the required amount of insurance.
• Replacement cost of the building: $1,000,000
• Coinsurance percentage: 80%
• Insurance Required = $1,000,000 × 0.80 = $800,000
• Step 2: Determine the actual amount of insurance carried.
• The policy limit is $600,000.
• Step 3: Apply the coinsurance formula.
• The insured carried $600,000 of the required $800,000.
• Payout = ($600,000 / $800,000) × $200,000
• Payout = (0.75) × $200,000 = $150,000

The insurance company will only pay $150,000 of the $200,000 loss. The tempting wrong answer is $160,000 (B), which comes from incorrectly multiplying the loss by the 80% coinsurance factor ($200,000 * 0.80). This is a classic distractor.

HSA eligibility has strict rules that are frequently tested. To be eligible, an individual must:

1. Be covered by a qualified High Deductible Health Plan (HDHP).
2. Not be covered by any other non-HDHP health plan (with limited exceptions).
3. Not be enrolled in Medicare.
4. Not be claimed as a dependent on someone else's tax return.

Let's evaluate the options:

• A. Mark: He is enrolled in Medicare. This is an automatic disqualifier for HSA contributions.
• B. Lisa: Her plan's deductible of $1,000 is below the minimum required for an HDHP. She is not eligible.
• C. David: He is covered by another non-HDHP plan (his spouse's HMO). This is a disqualifier, even if it's secondary coverage.
• D. Maria: She meets all the criteria. She is covered by an HDHP (the $2,000 deductible meets the minimum), she has no other disqualifying health coverage, and we assume she is not a dependent or on Medicare. She is eligible to contribute.

This question tests your understanding of a key life insurance policy provision.

• A. Mandatory provision: This is incorrect. APL is an optional rider that the policyowner must elect. The standard non-forfeiture options (cash surrender, reduced paid-up, extended term) are mandatory, but APL is not.
• B. Prevents unintentional lapse: This is the core purpose of the APL provision. If a premium is not paid by the end of the grace period, the insurer automatically creates a loan against the policy's cash value to pay the premium, keeping the policy in force.
• C. Cash value greater than death benefit: This is impossible in a traditional whole life policy. The cash value can never exceed the death benefit.
• D. Must be activated after each miss: This is incorrect. The provision is automatic. Once elected, it activates on its own whenever a premium is missed, as long as there is sufficient cash value to cover the loan.

For a non-qualified annuity, the portion of each payment that is a return of the original investment (the "cost basis") is excluded from income tax. This is calculated using the exclusion ratio.

• Step 1: Calculate the total expected return.
• Monthly payment: $1,500
• Annual payments: $1,500 × 12 = $18,000
• Life expectancy: 20 years
• Expected Return = $18,000/year × 20 years = $360,000
• Step 2: Calculate the exclusion ratio.
• Exclusion Ratio = Investment in the Contract / Expected Return
• Investment in the Contract (cost basis): $200,000
• Exclusion Ratio = $200,000 / $360,000 = 0.5556 or 55.56%
• Step 3: Calculate the excluded amount for the first year.
• Total payments received in the first year: $18,000
• Excluded portion = Total Annual Payments × Exclusion Ratio
• Excluded portion = $18,000 × 0.5556 = $10,000

For the first year, $10,000 of the $18,000 received is a tax-free return of principal, and the remaining $8,000 is taxable ordinary income.

Understanding the structure of Medicare is critical for advising retirees.

• A. Part B coverage: Incorrect. Original Medicare (Part B) does not cover most routine dental, vision, or hearing services.
• B. Adding Medicare Advantage: Incorrect. A client cannot "add" a Medicare Advantage (Part C) plan to Original Medicare. They must choose one or the other. Enrolling in a Part C plan means you receive your Medicare benefits through that private plan, instead of through Original Medicare.
• C. Medigap policy function: Correct. Medigap (or Medicare Supplement Insurance) policies are sold by private companies to fill the "gaps" in Original Medicare, such as the Part A deductible or the Part B 20% coinsurance. This is the precise function of a Medigap plan.
• D. Part D inclusion: Incorrect. Medicare Part D (prescription drug coverage) is a standalone plan that must be enrolled in separately and requires a separate monthly premium.

BOE insurance is a specific type of disability policy with a narrow purpose: to cover the fixed, recurring operating expenses of a business if the owner is disabled.

• A. Lost profits: Not covered. BOE covers expenses, not revenue or profit.
• B. Owner's salary: Not covered. This is the most common misconception. The owner's own income must be covered by a separate individual disability income policy.
• C. Salary of a replacement: Not covered by a base BOE policy. However, many policies offer a "substitute" or "locum tenens" rider that would cover this cost. Since the question asks what a BOE policy covers (implying the standard contract), this is incorrect. A planner should know to look for this rider.
• D. Office lease payment: Correct. This is a classic example of a fixed overhead expense that continues whether the owner is working or not. Other examples include employee salaries, utilities, property taxes, and insurance premiums.

Both options allow a chronically or terminally ill individual to access life insurance death benefits while alive, but they operate through different mechanisms.

• A. Reversed roles: This statement has the parties reversed. The ADB comes from the insurer; the viatical settlement involves a third-party buyer.
• B. Correct distinction: This is the core difference. An Accelerated Death Benefit is a provision on your own policy, and you deal directly with your insurance company. A viatical settlement is a transaction where you sell your entire policy to a viatical settlement company (a third party) for a lump sum. That company becomes the new owner and collects the full death benefit.
• C. Tax treatment: This is incorrect. Both qualified ADBs and qualified viatical settlements are generally received income tax-free if the insured is terminally ill (certified to die within 24 months) or chronically ill.
• D. Policy types: This is incorrect. ADB riders can be found on both term and permanent policies. Viatical settlements are typically done with permanent policies but can be done with any policy a buyer is willing to purchase.