ChFC HS 333 cheat sheet

The six-step financial planning process: establish and define the client-planner relationship; gather client data and determine goals; analyze the client's financial status; develop the plan; implement the plan; monitor the plan.

Quantitative data are objective facts (income, net worth, ages, policy values); qualitative data are subjective (risk tolerance, goals, health, attitudes) - both are required in step 2.

Time value of money formulas: FV = PV(1+r)^n; PV = FV/(1+r)^n; ordinary annuity PV = PMT[1−(1+r)^−n]/r; annuity due = ordinary annuity × (1+r).

Inflation-adjusted return (real rate) ≈ nominal rate − inflation rate; exact: (1+nominal)/(1+inflation) − 1.

Rule of 72: approximate doubling time = 72 ÷ annual return percentage.

Education funding need: future cost = current cost × (1+education inflation)^years; then solve for annual savings at the assumed return.

Emergency fund target is typically 3–6 months of essential expenses; 6–12 months for variable or single-income households.

Client risk tolerance must be documented and reconciled with the objective ability to bear risk; a conflict requires plan adjustment, not silent override.

Monitoring includes periodic review triggers: life events (marriage, birth, job change, inheritance), market shifts, and tax-law changes.

Risk-handling techniques: avoidance, reduction (loss control), retention (deductibles, self-insurance), and transfer (insurance); insurance is appropriate for low-frequency, high-severity exposures.

Human life value method: present value of the insured's future earnings net of personal consumption and taxes; needs method: income replacement + debts + education + final expenses − existing resources.

Term life provides pure death benefit with no cash value; whole life includes guaranteed cash value, level premiums, and policy loans; universal life separates cost of insurance from cash value and credits interest.

Cash value accumulation inside a life policy is tax-deferred; death benefits are generally income-tax-free under IRC §101(a); policy loans are not taxable while the policy remains in force.

Disability income policies: own-occupation definition pays if unable to perform the insured's own occupation; any-occupation is stricter; benefit periods and elimination periods define the coverage window.

Individual disability benefit is generally tax-free if premiums are paid with after-tax dollars; employer-paid premiums produce taxable benefits.

Long-term care triggers: inability to perform 2 of 6 activities of daily living (bathing, dressing, eating, toileting, transferring, continence) or cognitive impairment; typical elimination period 90 days.

Homeowners coverage: Coverage A dwelling, B other structures, C personal property, D loss of use, E personal liability, F medical payments; HO-3 covers dwelling on open-peril and personal property on named-peril basis.

Personal auto liability minimums vary by state; uninsured/underinsured motorist coverage addresses gaps left by at-fault drivers; umbrella policies sit above auto and homeowners limits.

Marginal tax rate applies to the next dollar of income; average (effective) tax rate = total tax ÷ total taxable income; planning decisions should use marginal rates.

Taxable income = gross income − above-the-line adjustments − standard or itemized deduction − qualified business income deduction (where applicable).

Capital gains: short-term (held ≤ 1 year) taxed at ordinary rates; long-term (held > 1 year) taxed at preferential 0%, 15%, or 20% rates plus 3.8% net investment income tax above the MAGI threshold.

Wash sale rule (IRC §1091): a loss on a security is disallowed if a substantially identical security is purchased within 30 days before or after the sale; basis is adjusted instead.

Tax-deferred growth: contributions to 401(k), traditional IRA, and annuities reduce current taxable income (or defer taxation); Roth contributions are made with after-tax dollars and qualified withdrawals are tax-free.

Above-the-line deductions include traditional IRA (if eligible), HSA contributions, student loan interest (subject to limits), and self-employed health insurance and retirement contributions.

Itemized deductions include state and local taxes (SALT cap), mortgage interest on acquisition debt (subject to limits), charitable contributions, and medical expenses above the AGI floor.

Gift and estate tax: the annual gift tax exclusion and the lifetime unified credit are separate; gifts above the annual exclusion use lifetime credit and require Form 709.

Estimated tax safe harbors: pay at least 90% of current-year tax or 100% of prior-year tax (110% if prior-year AGI exceeds the threshold) to avoid underpayment penalties.

Portfolio expected return = weighted average of asset expected returns; portfolio risk is not a simple weighted average because of correlation - lower correlation reduces portfolio standard deviation.

Systematic (market) risk cannot be diversified away; unsystematic (firm-specific) risk can be reduced through diversification.

CAPM: expected return = risk-free rate + beta × (market return − risk-free rate); beta measures sensitivity to market movements.

Sharpe ratio = (portfolio return − risk-free rate) ÷ standard deviation; higher is better for risk-adjusted performance.

Bond price and yield move inversely; longer duration and lower coupon mean greater interest-rate sensitivity; duration approximates percentage price change for a 1% yield change.

Yield to maturity equates the present value of a bond's future cash flows to its price; current yield = annual coupon ÷ price.

Mutual fund vs. ETF: open-end mutual funds trade at end-of-day NAV; ETFs trade intraday like stocks and may have lower expense ratios but incur trading spreads.

Asset allocation should reflect time horizon, risk tolerance, and liquidity needs; rebalancing restores target weights and can control risk drift.

Investment policy statement documents objectives, constraints (liquidity, time horizon, tax, legal, unique), and review procedures.

Defined benefit plans promise a formula-based benefit (e.g., final average pay × years of service × accrual rate); defined contribution plans specify contributions, not benefits, and shift investment risk to the participant.

401(k) limits: employee elective deferral limit, catch-up contribution for age 50+, and total annual additions limit (employee + employer) apply; highly compensated employee nondiscrimination testing may restrict deferrals.

Traditional IRA deductibility depends on active-participant status and MAGI; Roth IRA contributions phase out at higher MAGI; Roth conversions are taxable in the year of conversion.

Required minimum distributions (RMDs) begin at the applicable age (currently 73, rising to 75 for those born 1960 or later) and are based on the prior year-end balance divided by the IRS Uniform Lifetime Table factor.

Social Security full retirement age is 66–67 depending on birth year; claiming at 62 permanently reduces benefits; delaying to 70 increases them by delayed retirement credits.

Retirement income replacement ratios commonly target 70–80% of pre-retirement income, adjusted for reduced work expenses and increased health care costs.

Sequence-of-returns risk: withdrawals during a market downturn can permanently impair a retirement portfolio; mitigation includes cash reserves, flexible spending, and bucket strategies.

Safe withdrawal research (e.g., 4% initial withdrawal adjusted for inflation) is a planning heuristic, not a guarantee; actual sustainable rates depend on fees, allocation, and horizon.

Qualified plan distributions before age 59½ generally incur a 10% additional tax unless an exception applies (e.g., disability, separation from service at 55+ for qualified plans, substantially equal periodic payments).

Gross estate includes all property owned at death, certain transfers within three years of death, retained interests, and life insurance proceeds where the decedent held incidents of ownership.

Taxable estate = gross estate − deductions (debts, expenses, charitable and marital deductions) − adjusted taxable gifts; tentative tax is then reduced by the unified credit.

Unlimited marital deduction defers estate tax between spouses; portability allows a surviving spouse to use the deceased spouse's unused exclusion amount (DSUE) if an election is made on a timely estate tax return.

Annual gift tax exclusion allows tax-free gifts per donee per year; gifts above the exclusion use lifetime exclusion and require Form 709; direct payments of tuition or medical expenses are excluded from gift tax without using the annual exclusion.

Irrevocable life insurance trust (ILIT) removes policy proceeds from the insured's estate if the trust owns the policy and the three-year look-back rule is satisfied.

Intestacy: dying without a valid will means state law determines distribution; a will requires testamentary capacity, intent, and proper execution formalities.

Probate is the court-supervised process of validating a will and distributing assets; assets passing by beneficiary designation, joint tenancy, or trust generally avoid probate.

Trust components: grantor, trustee, beneficiary, corpus; revocable trusts allow amendment and retain control but do not remove assets from the estate; irrevocable trusts generally do.

Powers of attorney (financial) and health care directives (living will, health care proxy) address incapacity; they are distinct from wills, which take effect only at death.