CLU flashcards
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32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Pure risk
- A situation with only the possibility of loss or no loss and no chance of gain; generally the only category of risk considered insurable by private insurers.
- Speculative risk
- A situation offering a chance of gain as well as loss, such as a business venture or a stock purchase; generally not insurable.
- Insurable interest
- A financial relationship in which the policyholder gains from continued existence or loses from damage, required at policy issue for life insurance.
- Principle of indemnity
- The concept that a covered loss restores the insured to approximately the pre-loss financial position without profit; life insurance and valued policies are exceptions.
- Coinsurance clause
- A property insurance provision requiring coverage of at least a stated percentage of property value to avoid a penalty on partial losses.
- Subrogation
- The insurer's right, after paying a claim, to recover from the negligent third party responsible for the loss, preventing the insured from double recovery.
- Negligence elements
- The four elements a claimant must prove in a liability claim: a duty owed, a breach of that duty, proximate cause, and actual damages.
- Personal auto policy
- A standard auto contract with four parts: liability, medical payments, uninsured/underinsured motorists, and physical damage to the insured auto.
- MEC 7-pay test
- A life policy that fails the seven-pay premium test; withdrawals are taxed income first and a 10 percent penalty applies before age 59 and one-half.
- Incontestability clause
- A provision barring the insurer from contesting the policy for misrepresentation after two years from issue, except for nonpayment of premium.
- Nonforfeiture options
- Guaranteed choices when a permanent policy lapses: cash surrender value, reduced paid-up insurance, or extended term insurance for the net cash value.
- 1035 exchange
- A tax-free exchange of a life policy for another life policy, an annuity, or a qualified long-term care contract; annuity to life exchange does not qualify.
- Transfer-for-value rule
- Selling or assigning a life policy for consideration makes the death benefit taxable to the buyer unless an exception such as the insured or a partner applies.
- Settlement options
- Methods of paying policy proceeds: lump sum, interest only, fixed period, fixed amount, or life income with or without a period certain.
- Waiver of premium rider
- A rider that keeps a policy in force by waiving premiums during total disability, usually after a waiting period of about six months.
- Group term imputed income
- Employer-paid group term coverage exceeding 50,000 dollars creates taxable imputed income to the employee, calculated using IRS Table I rates.
- Gross estate
- All property the decedent owned or controlled at death, including life insurance with incidents of ownership and certain transfers within three years of death.
- Annual gift exclusion
- The amount one person may give each donee per year free of gift tax and without consuming lifetime exemption; the figure is indexed for inflation.
- Marital deduction
- An unlimited estate and gift tax deduction for property passing to a surviving spouse, provided the spouse is a U.S. citizen or a QDOT is used.
- Portability election
- An election on a timely filed estate tax return letting the surviving spouse use the deceased spouse's unused exclusion amount, known as DSUE.
- Step-up in basis
- Heirs' basis in property included in the gross estate becomes fair market value at death, eliminating lifetime appreciation from income tax.
- Intestate succession
- State statutory distribution of a decedent's probate property when no valid will exists; shares to spouse, children, and other heirs follow state formula.
- QTIP trust
- A marital deduction trust paying income to the surviving spouse for life with the remainder to beneficiaries chosen by the deceased; assets are taxed in the survivor's estate.
- Incidents of ownership
- Rights over a life policy such as cash value access, beneficiary change, or surrender; holding them at death pulls the proceeds into the insured's estate.
- Cross-purchase buy-sell
- An agreement in which surviving owners personally purchase a departing owner's interest, giving each buyer basis equal to the price paid.
- Entity redemption buy-sell
- A buy-sell in which the business itself purchases a departing owner's interest; surviving owners receive no step-up in basis from the transaction.
- IRC 101(j)
- A rule taxing employer-owned life insurance death benefits unless notice, consent, and eligible-employee requirements are met and a stated exception applies.
- Key person insurance
- Business-owned life or disability coverage on an essential employee; premiums are nondeductible and death proceeds are generally received income-tax free.
- Section 6166 deferral
- Estate tax deferral for a closely held business exceeding 35 percent of the adjusted gross estate, payable in installments over up to 14 years.
- Section 303 redemption
- A stock redemption treated as capital gain that may be used to pay death taxes and funeral or administration expenses when the business exceeds 35 percent of the gross estate.
- Executive bonus plan
- A Section 162 arrangement in which the employer pays a deductible premium bonus, the employee owns the policy, and the premium is taxable income to the employee.
- Disability buy-out insurance
- Coverage that funds a buy-sell when an owner becomes permanently disabled, typically paying a lump sum after a waiting period.