Certified Financial Consultant (CFC) Practice Exam

What approach is used to determine how much insurance an individual requires based on their financial objectives?

1. Needs Approach

2. Market Value Approach

3. Income Replacement Approach

4. Comprehensive Approach

The correct answer is: Needs Approach

The Needs Approach is correct because it focuses on calculating the insurance coverage necessary to meet an individual's specific financial needs and goals. This approach involves assessing various factors, including current debts, future financial obligations like children's education or mortgage payments, and income replacement for dependents. By analyzing an individual's unique circumstances and objectives, the Needs Approach helps ensure that the insurance coverage is tailored to provide adequate financial protection and support in the event of unforeseen circumstances, such as the loss of income or unexpected expenses. In contrast, the other approaches may not directly address personalized financial needs. The Market Value Approach typically focuses on assessing the value of property or assets rather than individual financial requirements. The Income Replacement Approach emphasizes replacing lost income, which is important but does not comprehensively evaluate all financial objectives. Lastly, the Comprehensive Approach may encapsulate various financial aspects but lacks the specific focus that the Needs Approach provides in determining insurance coverage tailored to individual situations.