Which statement explains why finite risk plans may not preserve liquidity for Cara's goal?

Which statement explains why finite risk plans may not preserve liquidity for Cara's goal?

• A. Because cash flows are smoothed over multiple periods
• B. Because premium payments are usually paid upfront
• C. Because the insured ultimately pays for all its own losses
• D. Because the insurer will not issue a policy guaranteeing that all covered claims will be paid

Answer: (B)

Finite risk plans affect liquidity because they require a substantial premium to be paid upfront, funding the risk transfer for a defined period. That large, initial cash outlay uses available funds immediately, leaving less liquidity for Cara’s other needs. In contrast, if cash flows were smoothed over multiple periods, the impact on liquidity would be less severe. The idea that the insured ultimately pays for all losses or that the insurer won’t guarantee payment doesn’t directly address the timing of cash, which is what undermines liquidity in this setup. Paying the premium upfront is the key factor that can reduce immediate liquidity, making it harder to preserve cash for Cara’s goal.

Finite risk plans affect liquidity because they require a substantial premium to be paid upfront, funding the risk transfer for a defined period. That large, initial cash outlay uses available funds immediately, leaving less liquidity for Cara’s other needs. In contrast, if cash flows were smoothed over multiple periods, the impact on liquidity would be less severe. The idea that the insured ultimately pays for all losses or that the insurer won’t guarantee payment doesn’t directly address the timing of cash, which is what undermines liquidity in this setup. Paying the premium upfront is the key factor that can reduce immediate liquidity, making it harder to preserve cash for Cara’s goal.