Certified Financial Consultant (CFC) Practice Exam

How is peril most easily defined in insurance terms?

1. The risk of financial loss

2. The insured amount of coverage

3. The cause of loss insured against

4. Legal responsibility for damages

The correct answer is: The cause of loss insured against

In insurance terms, peril is most easily defined as the cause of loss that is insured against. This refers specifically to the events or incidents that can lead to financial loss, such as fire, theft, or natural disasters. When an insurance policy is purchased, it typically outlines the specific perils that are covered under that policy. Understanding what constitutes peril is essential for both policyholders and insurance providers, as it delineates the scope of coverage and the risks that are shared in the insurance contract. The other options, while related to insurance, do not accurately describe the concept of peril. The risk of financial loss pertains to the broader notion of risk management in insurance. The insured amount of coverage refers to the limit of financial protection available under a policy but does not define what causes the loss. Legal responsibility for damages relates to liability insurance concepts rather than the definition of peril itself. By focusing on the cause of loss, it is clear that peril directly aligns with the fundamental purpose of insurance — to provide coverage against specific risks.