ChFC flashcards
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32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Rule of 72
- Years to double an investment equals 72 divided by the annual rate of return; at 6% a sum doubles in about 12 years.
- Net worth
- Assets minus liabilities at a point in time; a stock measure of financial position rather than a flow of income.
- Current ratio
- Liquid assets divided by current liabilities; measures a household's ability to cover short-term obligations without new borrowing.
- Opportunity cost
- Value of the next best alternative forgone when a resource such as money or time is committed to one particular use.
- Coinsurance clause
- Property insurance formula of insurance carried divided by insurance required, times the loss, capped at the policy limit; penalizes underinsurance.
- Elimination period
- Waiting period before disability or long-term-care benefits begin; a longer period lowers the premium but requires other reserves.
- Human life value
- Present value of the insured's future earnings available to dependents, used as one method of life insurance needs analysis.
- Insurable interest
- Financial or emotional stake in the continued life of the insured, required at policy inception for the contract to be valid.
- Marginal tax rate
- Tax rate applied to the next dollar of income; used for decisions about deductions, contributions, and Roth conversions.
- Stepped-up basis
- Heirs receive assets with a basis equal to fair market value on the date of death, erasing gain that accrued during life.
- Net investment income tax
- 3.8% surtax on net investment income above MAGI thresholds of $200,000 for single and $250,000 for married filing jointly.
- Constructive receipt
- Income is taxable when made available to the taxpayer without substantial restrictions, even if the taxpayer does not take it.
- Required beginning date
- April 1 of the year after the account owner reaches required minimum distribution age, which is 73 for those born 1951–1959.
- Delayed retirement credit
- Social Security benefit increase of 8% per year for claims filed after full retirement age, available up to age 70.
- Roth five-year rule
- Tax-free Roth earnings require the account to be held five tax years and the owner to be 59½ or another exception to apply.
- Replacement ratio
- Retirement income expressed as a percentage of pre-retirement income; commonly targeted at 70% to 80% of gross income.
- CAPM
- Expected return equals the risk-free rate plus beta times the market risk premium; the model compensates only systematic risk.
- Sharpe ratio
- Excess return above the risk-free rate divided by standard deviation; measures reward earned per unit of total risk.
- Duration
- Weighted average time to cash flows; approximate percentage price change equals negative duration times the change in yield.
- Standard deviation
- Statistical measure of dispersion of returns around the mean, used as a proxy for the total volatility of an investment.
- Portability
- Surviving spouse may use the deceased spouse's unused exclusion amount, elected on a timely filed estate tax return.
- Crummey power
- Temporary withdrawal right in a trust that converts a gift of a future interest into a present interest for the annual exclusion.
- Intestate succession
- State statute distributing property when someone dies without a valid will; spouse and children generally take first.
- Generation-skipping transfer tax
- Tax on transfers to grandchildren or others two or more generations below the transferor, layered on gift and estate tax.
- Housing expense ratio
- Monthly housing costs divided by gross monthly income; 28% is a common affordability guideline used by mortgage lenders.
- Monte Carlo analysis
- Simulation of thousands of possible return paths used to estimate the probability that a plan funds its stated goals.
- Capital needs analysis
- Method of determining life insurance need as the present value of resources required minus resources already available.
- Per stirpes
- Beneficiary designation that distributes a deceased child's share to that child's descendants rather than splitting equally among survivors.
- Loss aversion
- Tendency for losses to feel roughly twice as painful as equivalent gains, producing overly cautious or risk-seeking behavior.
- Anchoring
- Fixating on an initial number, such as a purchase price or a forecast, when making later estimates or decisions.
- Health savings account
- Triple-tax-advantaged account paired with a high-deductible health plan; contributions deductible, growth deferred, qualified medical withdrawals tax-free.
- Regulation Best Interest
- SEC rule requiring broker-dealers to act in the best interest of retail customers when making an investment recommendation.