LUTCF Course 2 cheat sheet

Three parties govern a life policy: owner controls all rights (beneficiary change, surrender, assignment); insured's life is the risk measured; beneficiary receives proceeds. Owner and insured need not be the same person.

Insurable interest must exist at policy issue, not at death. Spouses, business partners, key employees, and creditors (to the extent of debt) generally qualify; consent of the insured is required for third-party ownership.

Level premium whole life builds cash value; the reserve is a liability of the insurer. Cash surrender value equals reserve minus surrender charges; policy loans accrue interest and reduce the death benefit only if unpaid at death.

Nonforfeiture options on lapse of a cash-value policy: reduced paid-up (smaller face, no more premiums), extended term (face amount for a limited period), or cash surrender.

Dividends are a return of divisible surplus, not guaranteed, and are not taxable until cumulative dividends exceed total premiums paid (then ordinary income). Paid-up additions, premium reduction, cash, and accumulation at interest are the standard options.

Underwriting classes: preferred/standard/substandard rated by mortality; a flat extra is a fixed charge per $1,000 of face for a set period; a table rating is a percentage multiplier on the base premium.

Tax treatment: death benefit is income-tax-free to the beneficiary under IRC 101(a); cash value grows tax-deferred; surrender gain is taxable to the extent cash value exceeds basis (premiums paid less dividends and prior withdrawals).

Annuity mechanics: accumulation phase versus annuitization; immediate versus deferred; fixed, indexed, and variable. Payout options include life only, life with period certain, joint and survivor, and straight period certain.

Variable products are securities: sales require both a life insurance license and FINRA registration, and the separate account is registered under the Investment Company Act of 1940. Fixed indexed crediting uses caps, participation rates, and floors.

Individual major medical must cover ten essential health benefit categories and cannot impose annual or lifetime dollar limits on those benefits; preventive services are covered with no cost sharing when in-network.

Cost-sharing vocabulary: deductible (amount paid before benefits begin), coinsurance (insured's percentage of the remaining bill), copay (flat dollar amount), and out-of-pocket maximum, which caps covered in-network spending.

Coordination of benefits: the plan of the parent whose birthday falls earlier in the year pays first for a dependent child (the birthday rule); the primary plan pays its full benefit and the secondary pays the lesser of its own benefit or the remaining balance.

Disability definitions rank from most to least favorable to the insured: own occupation (any occupation after a stated period), modified own occupation, any occupation, and loss of income.

Disability policy provisions: elimination period (time before benefits begin), benefit period, residual or partial disability benefit, presumptive disability (total benefit for loss of sight or two limbs), and waiver of premium.

Business disability coverages: business overhead expense reimburses fixed operating costs for a short benefit period; disability buy-out funds a purchase of a disabled owner's interest; key person indemnifies the firm.

Health plan types: HMO (closed network, gatekeeper, no non-emergency out-of-network coverage), PPO (network discounts, out-of-network allowed with higher cost sharing), and high-deductible plans paired with an HSA.

Long-term care: benefit triggers are inability to perform two of six activities of daily living for at least 90 days or severe cognitive impairment; benefits are tax-free up to a per-diem limit indexed annually.

Medicare parts: Part A hospital (premium-free with sufficient work history), Part B medical, Part C Medicare Advantage, Part D prescriptions. Medigap plans are standardized by letter and do not include drug coverage.

Qualified plan contribution limits are indexed annually; catch-up contributions are permitted at age 50 and older, with a special higher catch-up for ages 60 to 63 in employer plans.

2024 IRA limit is $7,000 with a $1,000 catch-up; traditional IRA deductibility phases out when the taxpayer is covered by a workplace plan (or has a spouse who is); Roth IRA contributions phase out by MAGI.

Required minimum distributions begin at age 73 for those born 1951-1959 and age 75 for those born 1960 or later; the first-year deadline can be deferred to April 1 of the following year, but the second distribution is then also due that year.

Roth conversions are taxable in the year of conversion and cannot be undone (recharacterization of conversions was eliminated); the five-year rule governs earnings and each conversion has its own clock.

Defined benefit formula: benefit = years of service x benefit multiplier x final average compensation, often integrated with Social Security. Cash balance plans express the benefit as a hypothetical account balance.

Defined contribution plans shift investment risk to the participant; ERISA fiduciary duties, vesting schedules, and nondiscrimination testing distinguish them from nonqualified deferred compensation, which is used to supplement benefits for executives.

Social Security: full retirement age is 67 for those born 1960 or later; claiming at 62 permanently reduces the benefit (about 30 percent at FRA 67), and delaying to 70 increases it by 8 percent per year after FRA.

Retirement income sequencing commonly uses a bucket approach: near-term spending from cash and short-duration bonds, intermediate from balanced holdings, and long-term growth from equities; the 4 percent rule is a rough planning benchmark, not a guarantee.

Annuity and pension income taxation follows the exclusion ratio for nonqualified annuities: basis divided by expected return gives the tax-free fraction of each payment until basis is recovered.

The unlimited marital deduction defers estate tax on property passing to a surviving spouse who is a U.S. citizen; a noncitizen spouse requires a qualified domestic trust to obtain the deduction.

The annual gift tax exclusion is indexed and applies per donor per donee; gifts above it use lifetime exemption, and the exemption is portable to a surviving spouse via a timely filed estate tax return.

Basis rules: inherited assets receive a stepped-up basis to fair market value at death, while lifetime gifts carry over the donor's basis. This drives the choice between gifting and bequeathing.

A will is probated and controls only probate assets; beneficiary designations, joint tenancy, transfer-on-death, and trusts pass outside probate and override the will.

Trust roles: grantor creates and funds; trustee holds legal title and owes fiduciary duties; beneficiary holds equitable title. Revocable trusts avoid probate but do not remove assets from the taxable estate.

Irrevocable life insurance trusts remove proceeds from the estate but require a three-year lookback if existing policies are transferred, and the grantor generally cannot retain incidents of ownership.

Advanced techniques: GRAT (freezes appreciation), charitable remainder trust (income stream then charity), charitable lead trust (charity first, remainder to heirs), and family limited partnership (valuation discounts subject to scrutiny).

Estate settlement costs include probate fees, executor commissions, and state estate or inheritance taxes; liquidity planning often uses life insurance to fund taxes without forced asset sales.

Powers of attorney, health care proxies, and HIPAA authorizations are incapacity documents that operate during life and are separate from the will and trust.

Three parties govern a life policy: owner controls all rights (beneficiary change, surrender, assignment); insured's life is the risk measured; beneficiary receives proceeds. Owner and insured need not be the same person.

Insurable interest must exist at policy issue, not at death. Spouses, business partners, key employees, and creditors (to the extent of debt) generally qualify; consent of the insured is required for third-party ownership.

Level premium whole life builds cash value; the reserve is a liability of the insurer. Cash surrender value equals reserve minus surrender charges; policy loans accrue interest and reduce the death benefit only if unpaid at death.

Nonforfeiture options on lapse of a cash-value policy: reduced paid-up (smaller face, no more premiums), extended term (face amount for a limited period), or cash surrender.

Dividends are a return of divisible surplus, not guaranteed, and are not taxable until cumulative dividends exceed total premiums paid (then ordinary income). Paid-up additions, premium reduction, cash, and accumulation at interest are the standard options.

Underwriting classes: preferred/standard/substandard rated by mortality; a flat extra is a fixed charge per $1,000 of face for a set period; a table rating is a percentage multiplier on the base premium.

Tax treatment: death benefit is income-tax-free to the beneficiary under IRC 101(a); cash value grows tax-deferred; surrender gain is taxable to the extent cash value exceeds basis (premiums paid less dividends and prior withdrawals).

Annuity mechanics: accumulation phase versus annuitization; immediate versus deferred; fixed, indexed, and variable. Payout options include life only, life with period certain, joint and survivor, and straight period certain.

Variable products are securities: sales require both a life insurance license and FINRA registration, and the separate account is registered under the Investment Company Act of 1940. Fixed indexed crediting uses caps, participation rates, and floors.

Individual major medical must cover ten essential health benefit categories and cannot impose annual or lifetime dollar limits on those benefits; preventive services are covered with no cost sharing when in-network.

Cost-sharing vocabulary: deductible (amount paid before benefits begin), coinsurance (insured's percentage of the remaining bill), copay (flat dollar amount), and out-of-pocket maximum, which caps covered in-network spending.

Coordination of benefits: the plan of the parent whose birthday falls earlier in the year pays first for a dependent child (the birthday rule); the primary plan pays its full benefit and the secondary pays the lesser of its own benefit or the remaining balance.

Disability definitions rank from most to least favorable to the insured: own occupation (any occupation after a stated period), modified own occupation, any occupation, and loss of income.

Disability policy provisions: elimination period (time before benefits begin), benefit period, residual or partial disability benefit, presumptive disability (total benefit for loss of sight or two limbs), and waiver of premium.

Business disability coverages: business overhead expense reimburses fixed operating costs for a short benefit period; disability buy-out funds a purchase of a disabled owner's interest; key person indemnifies the firm.

Health plan types: HMO (closed network, gatekeeper, no non-emergency out-of-network coverage), PPO (network discounts, out-of-network allowed with higher cost sharing), and high-deductible plans paired with an HSA.

Long-term care: benefit triggers are inability to perform two of six activities of daily living for at least 90 days or severe cognitive impairment; benefits are tax-free up to a per-diem limit indexed annually.

Medicare parts: Part A hospital (premium-free with sufficient work history), Part B medical, Part C Medicare Advantage, Part D prescriptions. Medigap plans are standardized by letter and do not include drug coverage.

Qualified plan contribution limits are indexed annually; catch-up contributions are permitted at age 50 and older, with a special higher catch-up for ages 60 to 63 in employer plans.

2024 IRA limit is $7,000 with a $1,000 catch-up; traditional IRA deductibility phases out when the taxpayer is covered by a workplace plan (or has a spouse who is); Roth IRA contributions phase out by MAGI.

Required minimum distributions begin at age 73 for those born 1951-1959 and age 75 for those born 1960 or later; the first-year deadline can be deferred to April 1 of the following year, but the second distribution is then also due that year.

Roth conversions are taxable in the year of conversion and cannot be undone (recharacterization of conversions was eliminated); the five-year rule governs earnings and each conversion has its own clock.

Defined benefit formula: benefit = years of service x benefit multiplier x final average compensation, often integrated with Social Security. Cash balance plans express the benefit as a hypothetical account balance.

Defined contribution plans shift investment risk to the participant; ERISA fiduciary duties, vesting schedules, and nondiscrimination testing distinguish them from nonqualified deferred compensation, which is used to supplement benefits for executives.

Social Security: full retirement age is 67 for those born 1960 or later; claiming at 62 permanently reduces the benefit (about 30 percent at FRA 67), and delaying to 70 increases it by 8 percent per year after FRA.

Retirement income sequencing commonly uses a bucket approach: near-term spending from cash and short-duration bonds, intermediate from balanced holdings, and long-term growth from equities; the 4 percent rule is a rough planning benchmark, not a guarantee.

Annuity and pension income taxation follows the exclusion ratio for nonqualified annuities: basis divided by expected return gives the tax-free fraction of each payment until basis is recovered.

The unlimited marital deduction defers estate tax on property passing to a surviving spouse who is a U.S. citizen; a noncitizen spouse requires a qualified domestic trust to obtain the deduction.

The annual gift tax exclusion is indexed and applies per donor per donee; gifts above it use lifetime exemption, and the exemption is portable to a surviving spouse via a timely filed estate tax return.

Basis rules: inherited assets receive a stepped-up basis to fair market value at death, while lifetime gifts carry over the donor's basis. This drives the choice between gifting and bequeathing.

A will is probated and controls only probate assets; beneficiary designations, joint tenancy, transfer-on-death, and trusts pass outside probate and override the will.

Trust roles: grantor creates and funds; trustee holds legal title and owes fiduciary duties; beneficiary holds equitable title. Revocable trusts avoid probate but do not remove assets from the taxable estate.

Irrevocable life insurance trusts remove proceeds from the estate but require a three-year lookback if existing policies are transferred, and the grantor generally cannot retain incidents of ownership.

Advanced techniques: GRAT (freezes appreciation), charitable remainder trust (income stream then charity), charitable lead trust (charity first, remainder to heirs), and family limited partnership (valuation discounts subject to scrutiny).

Estate settlement costs include probate fees, executor commissions, and state estate or inheritance taxes; liquidity planning often uses life insurance to fund taxes without forced asset sales.

Powers of attorney, health care proxies, and HIPAA authorizations are incapacity documents that operate during life and are separate from the will and trust.