Advanced Diploma of Financial Planning (ADFP) Practice Test

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Excel in the Advanced Diploma of Financial Planning Test with comprehensive quizzes. Study with detailed questions, hints, and explanations. Prepare for success now!

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What does insurance allow individuals to do?

Invest in high-risk stocks
Protect against financial loss
Guarantee a steady income
Avoid any responsibilities

The correct answer is: Protect against financial loss

The correct answer is that insurance allows individuals to protect against financial loss. Insurance functions as a risk management tool that provides a safety net for individuals and businesses. By paying premiums, policyholders transfer the financial risks associated with certain unforeseen events—such as accidents, illnesses, or property damage—to the insurance provider. In the event of a covered incident, the insurance company provides compensation, thereby reducing the financial burden that the individual might otherwise face. This mechanism enables individuals to maintain their financial stability and peace of mind, knowing they have support in times of crisis. The other options do not accurately reflect the primary purpose of insurance. Investing in high-risk stocks pertains to a different financial strategy focused on potential returns, while insurance is not about investment growth. Guaranteeing a steady income pertains more to income protection or annuities rather than general insurance coverage. Lastly, insurance does not enable individuals to avoid responsibilities; instead, it allows them to manage and mitigate the financial repercussions of those responsibilities in emergencies.