ChFC HS 333 flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Six-step financial planning process

Establish relationship, gather data and goals, analyze status, develop plan, implement plan, monitor plan. Steps are sequential but iterative; monitoring feeds back into analysis and plan updates.

Quantitative vs qualitative data

Quantitative data are objective facts such as income, net worth, and ages. Qualitative data are subjective, including risk tolerance, goals, health, and attitudes. Both are required during data gathering.

Future value formula

FV = PV × (1 + r)^n, where PV is present value, r is the periodic rate, and n is the number of periods. Compounding frequency requires adjusting r and n accordingly.

Rule of 72

Approximate doubling time equals 72 divided by the annual return percentage. At 6% annual return, money doubles in roughly 12 years; at 9%, in about 8 years.

Emergency fund target

Typically three to six months of essential living expenses. Six to twelve months is often used for single-income households, variable income, or higher job-risk situations.

Risk-handling techniques

Avoidance eliminates the exposure; reduction lessens loss frequency or severity; retention accepts the risk (deductibles); transfer shifts risk to an insurer. Insurance suits low-frequency, high-severity exposures.

Human life value method

Life insurance need equals the present value of the insured's future earnings net of personal consumption and taxes. It measures the economic value of the insured to dependents.

Term vs whole life

Term life provides a death benefit for a set period with no cash value. Whole life provides lifetime coverage, level premiums, and guaranteed cash value that can be borrowed against.

Own-occupation disability definition

Pays benefits if the insured cannot perform the duties of their own occupation, regardless of ability to work elsewhere. It is broader and more favorable than any-occupation coverage.

Long-term care benefit triggers

Benefits generally begin when the insured cannot perform two of six activities of daily living (bathing, dressing, eating, toileting, transferring, continence) or has cognitive impairment.

HO-3 homeowners policy

Covers the dwelling on an open-peril basis and personal property on a named-peril basis. It includes other structures, loss of use, personal liability, and medical payments coverage.

Marginal vs average tax rate

The marginal rate applies to the next dollar of income and guides planning decisions. The average rate equals total tax divided by total taxable income and reflects overall burden.

Long-term capital gains rates

Assets held more than one year qualify for preferential rates of 0%, 15%, or 20% based on taxable income. A 3.8% net investment income tax may apply above MAGI thresholds.

Wash sale rule

Under IRC §1091, a loss is disallowed if a substantially identical security is bought within 30 days before or after the sale. The disallowed loss adjusts the basis of the replacement shares.

Above-the-line deductions

Adjustments to gross income available whether or not the taxpayer itemizes. Examples include HSA contributions, eligible traditional IRA contributions, student loan interest, and self-employed retirement contributions.

Estimated tax safe harbor

Avoid underpayment penalties by paying at least 90% of current-year tax or 100% of prior-year tax (110% if prior-year AGI exceeds the threshold). Payments are made quarterly.

Portfolio expected return

The weighted average of each asset's expected return based on portfolio weights. Portfolio risk is not a weighted average because correlation between assets affects total standard deviation.

Systematic vs unsystematic risk

Systematic risk is market-wide and cannot be diversified away. Unsystematic risk is firm-specific and can be reduced through diversification across assets and sectors.

CAPM expected return

Expected return = risk-free rate + beta × (market return − risk-free rate). Beta measures sensitivity to market movements; a beta above 1 indicates greater volatility than the market.

Sharpe ratio

Equals (portfolio return − risk-free rate) divided by portfolio standard deviation. It measures excess return per unit of total risk; a higher ratio indicates better risk-adjusted performance.

Bond price-yield relationship

Bond prices and yields move inversely. Longer duration and lower coupons increase sensitivity to interest-rate changes; duration approximates the percentage price change for a 1% yield change.

Mutual fund vs ETF

Open-end mutual funds trade once daily at net asset value. ETFs trade intraday like stocks, may have lower expense ratios, but incur bid-ask spreads and brokerage costs.

Investment policy statement

Documents investment objectives and constraints: liquidity, time horizon, tax considerations, legal and regulatory factors, and unique client circumstances. It guides portfolio construction and review.

Defined benefit vs contribution plans

Defined benefit plans promise a formula-based benefit and place investment risk on the employer. Defined contribution plans specify contributions only and shift investment risk to the participant.

Roth IRA contribution limits

Contributions are made with after-tax dollars and phase out at higher MAGI levels. Qualified withdrawals are tax-free; contributions can be withdrawn anytime without tax or penalty.

Required minimum distributions

RMDs generally begin at age 73 (75 for those born 1960 or later). The amount equals the prior year-end account balance divided by the IRS Uniform Lifetime Table factor.

Social Security claiming age

Full retirement age is 66 to 67 depending on birth year. Claiming at 62 permanently reduces benefits; delaying to age 70 increases them through delayed retirement credits.

Sequence-of-returns risk

The risk that withdrawals during a market downturn permanently impair a retirement portfolio. Mitigation includes holding cash reserves, flexible spending, and bucket strategies.

10% early distribution penalty

Qualified plan and IRA distributions before age 59½ generally incur a 10% additional tax. Exceptions include disability, qualifying separation from service at 55+, and substantially equal periodic payments.

Gross estate inclusion

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.

Marital deduction and portability

The unlimited marital deduction defers estate tax between spouses. Portability lets a surviving spouse use the deceased spouse's unused exclusion if a timely estate tax return election is made.

Irrevocable life insurance trust

An ILIT owns the policy and removes proceeds from the insured's estate, provided the trust is properly structured and the three-year look-back rule is satisfied for transferred policies.