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Practice and exam technique

Practice questions: risk management and insurance

Compiled by the Sitonce editorial team from CFP Board sources listed belowUpdated 4 min readFacts verified 1 September 2026
The short answer

Insurance is 11 per cent of the exam and turns on contract definitions rather than reasoning. These five cover occupational definitions, coinsurance, long-term care triggers, annuity taxation and product selection.

Most insurance questions ask whether a described event, under a described contract, produces a payment. That is a definitions question wearing a scenario.

Question 1

A surgeon develops a tremor and can no longer operate, but takes a teaching post at a lower salary. Under which definition does her policy pay a full benefit?

  1. Any occupation
  2. Own occupation
  3. Modified own occupation
  4. No definition pays, because she is working
Answer: B. Own occupation pays if the insured cannot perform the material duties of their own occupation, even while working elsewhere. Modified own occupation requires that she not be working elsewhere. Any occupation pays only if she cannot perform any work she is reasonably suited to, which teaching plainly is.
Question 2

A home has a replacement cost of USD 500,000. The owner carries USD 300,000 of coverage with an 80 per cent coinsurance requirement and a USD 1,000 deductible. A partial loss of USD 100,000 occurs. Approximately what is paid?

  1. USD 99,000
  2. USD 74,000
  3. USD 60,000
  4. USD 100,000
Answer: B. The required amount is 80 per cent of 500,000, which is 400,000. Insurance carried divided by insurance required is 300,000 over 400,000, or three quarters. Three quarters of the 100,000 loss is 75,000, less the 1,000 deductible, giving 74,000. The formula applies to partial losses only.
Question 3

A client with early-stage dementia can still perform all six activities of daily living independently. Does a tax-qualified long-term care policy pay?

  1. No - she fails no ADLs
  2. Yes - severe cognitive impairment is an alternative trigger
  3. Only after she fails two ADLs
  4. Only if the policy has a dementia rider
Answer: B. Severe cognitive impairment is an alternative benefit trigger to the two-of-six ADL requirement, not an addition to it. Treating the cognitive trigger as a supplement rather than an alternative is the error the question is built on. Whether her impairment meets the severity threshold is a separate clinical question.
Question 4

A client aged 55 withdraws USD 20,000 from a deferred annuity with a basis of USD 60,000 and a current value of USD 100,000. It has not been annuitized. What is the tax treatment?

  1. USD 12,000 taxable, USD 8,000 return of basis
  2. Fully taxable as ordinary income, plus a 10 per cent penalty
  3. Fully a tax-free return of basis
  4. Taxed as long-term capital gain
Answer: B. Withdrawals before annuitization come out last-in first-out - gain first. The contract has USD 40,000 of gain, so the whole USD 20,000 is gain, taxed as ordinary income with a 10 per cent penalty at 55. Option A applies the exclusion ratio, which only applies after annuitization.
Question 5

A couple aged 32 with two young children, a mortgage and limited cash flow need life insurance. Which is the appropriate primary recommendation?

  1. Whole life, for the guaranteed cash value
  2. Variable universal life, for the investment upside
  3. Level term to cover the mortgage and the dependency period
  4. An indexed universal life policy
Answer: C. The need is temporary - income replacement while children are dependent and the mortgage is outstanding - so term is the appropriate answer, and it buys the most death benefit per dollar. Permanent insurance answers permanent needs, and this scenario contains none.

What to take from these

Four of the five are answered by knowing a definition exactly. The fifth is answered by matching the product to the duration of the need.

That is the whole domain in two sentences, and it is why insurance rewards precise learning rather than reasoning from first principles.

Figures are for the 2026 tax year

Dollar limits and thresholds are indexed annually. Confirm current figures before relying on them; the exam tests the rule rather than the number.

Common questions

What does own-occupation disability cover?

It pays if the insured cannot perform the material duties of their own occupation, even while working elsewhere. Any occupation pays only if they cannot perform any suitable work.

How does the coinsurance formula work?

Insurance carried divided by insurance required, multiplied by the loss, less the deductible. The required amount is typically 80 per cent of replacement cost, and the formula applies to partial losses.

Does cognitive impairment trigger long-term care benefits?

Yes, as an alternative to the two-of-six ADL requirement rather than an addition to it. Treating it as a supplement is the error questions are built on.

How are annuity withdrawals taxed before annuitization?

Last-in first-out - gain first, taxed as ordinary income, with a 10 per cent penalty before 59½. The exclusion ratio applies only after annuitization.

When is term insurance the right answer?

For a temporary need - income replacement during dependency and while a mortgage is outstanding. Permanent insurance answers permanent needs, and buys less death benefit per dollar.

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