Advanced Diploma of Financial Planning (ADFP) Practice Test

Why is life insurance considered a fundamental ingredient in a financial plan?

1. It only benefits the insured person.

2. It is particularly important for clients with dependents.

3. It guarantees investment returns.

4. It is unnecessary for financial planning.

The correct answer is: It is particularly important for clients with dependents.

Life insurance is indeed considered a fundamental ingredient in a financial plan primarily because it provides financial protection for the dependents of the insured individual. When a person who has family members relying on their income or support passes away, life insurance can offer a safety net by ensuring that those dependents have the necessary financial resources to maintain their lifestyle and manage expenses such as housing, education, and day-to-day living costs. This type of policy is especially beneficial for those with dependents, as it addresses the potential financial hardship that could occur in the event of a premature death. It serves to replace lost income, pay off debts, and cover future financial goals like education for children or retirement for a surviving partner. Consequently, life insurance fills a crucial gap in the financial planning process by safeguarding the financial future of loved ones during uncertain times. The other options do not encapsulate the fundamental role life insurance plays, as they either misidentify its benefits or erroneously label it as unnecessary. Life insurance is more than just a tool for the insured; it's a critical component for creating a comprehensive plan that considers the eventualities of life and the needs of dependents.