Advanced Diploma of Financial Planning (ADFP) Practice Test

What type of insurance protects against liability risks?

1. Auto insurance only

2. Life insurance only

3. Personal liability insurance

4. Real estate insurance

The correct answer is: Personal liability insurance

Personal liability insurance is specifically designed to protect individuals from risks associated with liability claims. This type of insurance provides coverage in the event that someone sues for damages due to bodily injury or property damage that the insured may be responsible for. It is particularly important for homeowners and renters, as it can protect them against legal expenses and settlements that may arise from accidents occurring on their property or as a result of their actions outside the home. In contrast, auto insurance mainly covers risks associated with vehicles on the road, including damages from accidents, theft, and personal injury, but does not specifically address general liability risks. Life insurance provides financial protection in the event of the policyholder's death, offering a payout to beneficiaries but not covering liability matters. Real estate insurance, on the other hand, typically pertains to the protection of physical property rather than liability for injuries or damages that may occur within or around that property. Thus, personal liability insurance is essential for safeguarding an individual's financial well-being in case of costly legal claims, making it the correct choice for protection against liability risks.