Advanced Diploma of Financial Planning (ADFP) Practice Test

What two fundamental needs are associated with the money generated by a life insurance policy?

1. Replacing income and preserving assets

2. Investing in real estate and buying vehicles

3. Reducing debt and increasing expenses

4. Traveling and leisure activities

The correct answer is: Replacing income and preserving assets

The two fundamental needs associated with the money generated by a life insurance policy are primarily focused on providing financial security for dependents and ensuring financial stability for the policyholder's estate. Replacing income is critical because, in the event of the policyholder's death, their family or dependents may lose a significant source of income. Life insurance can help bridge that gap, allowing the family to maintain their standard of living and cover day-to-day expenses. Preserving assets is also a vital need, as it ensures that the policyholder's assets can be retained and passed on to beneficiaries. Life insurance proceeds can help cover estate taxes, funeral expenses, and other debts that might jeopardize the assets intended for heirs, thereby protecting the financial legacy. In contrast, other options listed focus on discretionary spending or specific financial activities that do not align with the primary purposes of life insurance. Investing in real estate and buying vehicles, for example, are more about personal investment choices rather than fundamental financial protections. Reducing debt and increasing expenses may relate to broader financial management but do not directly reflect the primary needs addressed by life insurance payouts. Lastly, traveling and leisure activities are purely personal desires that do not pertain to the essential financial security functions of life insurance.