CLU cheat sheet

Pure risk presents only loss or no loss and is generally insurable; speculative risk offers gain or loss and is generally not insurable.

Insurable risks need many homogeneous exposure units, accidental and measurable losses, no catastrophic concentration, and losses definite in time, place, and amount.

The principle of indemnity restores the insured to pre-loss financial position with no profit; life insurance and valued policies are deliberate exceptions.

Property coinsurance recovery formula: (insurance carried ÷ insurance required) × loss, then subtract the deductible, capped at the policy limit.

HO-3 insures the dwelling on an open-peril basis and personal property on a named-peril basis; HO-5 uses open peril on both.

The personal auto policy has four parts: A liability, B medical payments, C uninsured/underinsured motorists, and D physical damage to the auto.

Negligence requires four elements: a duty owed, breach of that duty, proximate cause, and actual damages.

Deductibles and coinsurance shift small or routine losses to the insured, reducing moral hazard and premium; health coinsurance is the insurer's percentage after the deductible.

Reinsurance involves cession of risk above a retention; treaties are automatic agreements while facultative placement is case by case.

IRC 101(a) makes death proceeds paid to a beneficiary income-tax free; interest paid after death is taxable under IRC 101(c).

Cash value inside buildup is tax-deferred; policy loans are not taxable unless the policy lapses or is a modified endowment contract.

A policy failing the 7-pay test is a MEC: distributions are taxed income first and a 10% penalty applies before age 59½.

The incontestability clause bars the insurer from contesting for misrepresentation after two years; the suicide exclusion is typically two years.

Nonforfeiture options on a lapsed permanent policy are cash surrender, reduced paid-up insurance, and extended term insurance.

Settlement options are lump sum, interest only, fixed period, fixed amount, and life income with or without a period certain.

IRC 1035 permits tax-free exchange of life insurance to life insurance, an annuity, or qualified LTC; annuity-to-life exchange does not qualify.

Under the transfer-for-value rule, proceeds become taxable income to a purchaser for consideration unless an exception applies (insured, partner, corporation, certain others).

Employer-paid group term coverage above $50,000 creates imputed income to the employee measured by Table I rates.

The gross estate includes all property owned or controlled at death, life insurance where the decedent held incidents of ownership, and certain transfers within three years of death.

The unlimited marital deduction applies to property passing to a surviving spouse who is a U.S. citizen; noncitizen spouses require a QDOT.

Portability lets the surviving spouse use the deceased spouse's unused exclusion (DSUE) only if the executor elects on a timely filed estate tax return.

The annual gift exclusion is per donee per year, indexed, and does not require a gift tax return unless other reportable gifts are made.

IRC 1014 gives a step-up (or step-down) in basis to fair market value at death for property included in the gross estate.

Probate assets pass under a will; nonprobate assets pass by contract or operation of law through joint tenancy, beneficiary designations, TOD/POD, and trust ownership.

Dying intestate means state statute controls distribution among heirs; a valid will is required to choose beneficiaries, fiduciaries, and guardians.

A credit shelter (bypass) trust uses the first decedent's exclusion, while a QTIP trust qualifies for the marital deduction but is taxed in the survivor's estate.

The GST tax applies to transfers to skip persons such as grandchildren and is avoided or reduced through allocation of the GST exemption.

In a cross-purchase buy-sell, surviving owners buy the interest personally and receive basis equal to the purchase price; in an entity redemption the remaining owners get no step-up.

IRC 101(j) taxes employer-owned life insurance death benefits above $50,000 unless notice, consent, and eligible-employee requirements are satisfied and an exception applies.

Key person life insurance premiums are nondeductible and proceeds are generally income-tax free; if structured as a Section 162 bonus, the premium is deductible compensation to the insured.

IRC 6166 allows estate tax deferral on a closely held business exceeding 35% of the adjusted gross estate, with installments over up to 14 years.

IRC 303 permits a stock redemption to pay death taxes and expenses as capital gain when the business exceeds 35% of the gross estate.

A Section 162 executive bonus plan has the employer pay a deductible premium bonus while the employee owns the policy and reports the premium as income; a double bonus grosses up the tax.

Disability buy-out coverage funds a buy-sell on an owner's permanent disability; business overhead expense coverage pays continuing fixed business costs.

S corporation shares may be held only by eligible shareholders such as individuals, estates, and qualifying trusts; a 2% shareholder's employer-paid health coverage is included in W-2 wages.

Buy-sell price-setting methods include fixed price, formula (book value, capitalization of earnings), independent appraisal, and wait-and-see.