Advanced Diploma of Financial Planning (ADFP) Practice Test

What is a defining characteristic of pure insurance?

1. It includes an investment component

2. It guarantees payment at maturity

3. It does not accumulate cash value

4. It has fixed premiums over time

The correct answer is: It does not accumulate cash value

Pure insurance is designed purely for protection against risk rather than for accumulation of savings or investment purposes. This type of insurance provides coverage for specific events, such as death or illness, without any additional features like savings or investment components. The defining characteristic that aligns with pure insurance is that it does not accumulate cash value, meaning that the policy is strictly for risk transfer rather than for building wealth or savings. In contrast, options that include an investment component or guarantee payment at maturity pertain to products like whole life insurance or investment-linked policies, where the policyholder has benefits that go beyond risk protection. Additionally, while fixed premiums are a common feature in certain types of insurance products, they are not exclusively representative of pure insurance, which rather emphasizes the absence of any cash value accumulation.