LUTCF Course 2 flashcards

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

Insurable Interest

A legal requirement that the policy owner would suffer a financial or emotional loss from the insured's death. It must exist when the policy is issued, not when the claim is filed.

Nonforfeiture Options

Choices available when a cash-value life policy lapses: reduced paid-up insurance, extended term insurance, or cash surrender. They protect the policyholder's accrued value from total forfeiture.

Policy Loan

A loan from the insurer secured by a whole life policy's cash value. Interest accrues, and any unpaid balance reduces the death benefit paid to the beneficiary.

Dividend Options

Ways a participating policyholder can take divisible surplus: cash, premium reduction, accumulation at interest, or paid-up additions. Dividends are not guaranteed and are generally tax-free until they exceed premiums paid.

Variable Annuity Registration

A variable annuity is a security. Selling it requires a state insurance license plus FINRA registration, and its separate account is registered under the Investment Company Act of 1940.

Annuity Exclusion Ratio

The fraction of each nonqualified annuity payment that is a tax-free return of basis. It equals investment in the contract divided by expected return, applied until basis is fully recovered.

Accelerated Death Benefit

A rider allowing the insured to receive part of the death benefit early upon terminal illness or qualifying condition. Proceeds are generally income-tax-free when the insured is terminally ill.

Flat Extra Premium

A fixed charge added to a life premium per thousand dollars of face amount, used for substandard risks. It usually applies for a stated number of years rather than permanently.

Coordination of Benefits

Rules determining which health plan pays first when a person has two coverages. The primary plan pays its benefit, and the secondary pays the lesser of its own benefit or the remaining balance.

Birthday Rule

For dependent children covered by both parents, the plan of the parent whose birthday falls earlier in the calendar year is primary, regardless of which parent is older.

Own Occupation Disability

A disability definition paying benefits when the insured cannot perform the material duties of their own occupation. It is the most favorable definition and usually the most expensive.

Elimination Period

The waiting period after disability begins before benefits are payable. Longer elimination periods lower premium, and it is distinct from the benefit period.

Presumptive Disability

A provision paying the full monthly benefit without an elimination period when the insured loses sight, hearing, speech, or two limbs, regardless of ability to work.

Business Overhead Expense

Disability coverage that reimburses a business's fixed operating costs while an owner is disabled. It typically has a short benefit period and excludes the owner's salary.

Long-Term Care Triggers

Conditions that activate LTC benefits: inability to perform two of six activities of daily living for at least 90 days, or severe cognitive impairment such as dementia.

Medigap Standardization

Medicare supplement policies are standardized by letter so benefits are identical across insurers, making price and service the differentiators. Medigap does not include prescription drug coverage.

HSA Eligibility

A health savings account requires enrollment in a qualifying high-deductible health plan, no other disqualifying coverage, and no Medicare enrollment. Contributions are deductible and withdrawals for medical costs are tax-free.

Health Reimbursement Arrangement

An employer-funded account that reimburses employees for medical expenses. Only the employer contributes, unused funds may roll over, and it is not portable to a new employer.

Required Minimum Distributions

Mandatory withdrawals from tax-deferred retirement accounts beginning at age 73 or 75 depending on birth year. Missing a distribution triggers a substantial excise penalty on the shortfall.

Roth Conversion

Moving traditional IRA or plan assets into a Roth account by paying income tax on the converted amount. The conversion is irrevocable, and qualified withdrawals are later tax-free.

Defined Benefit Formula

A pension benefit calculated as years of service multiplied by a benefit percentage and final average compensation. The employer bears investment risk and funds the promised benefit.

Vesting

The schedule under which an employee gains nonforfeitable rights to employer contributions. Employee deferrals are always fully vested immediately; employer contributions may use graded or cliff schedules.

Social Security Delayed Credit

For each year a worker delays claiming past full retirement age up to age 70, the benefit increases by 8 percent. Claiming early permanently reduces the benefit.

Nonqualified Deferred Compensation

An arrangement allowing selected executives to defer compensation without ERISA nondiscrimination limits. The employer's promise is unsecured, so the executive bears creditor risk.

Unlimited Marital Deduction

An estate tax deduction for property passing to a surviving spouse who is a U.S. citizen, deferring tax until the survivor's death. A noncitizen spouse requires a qualified domestic trust.

Annual Gift Tax Exclusion

The amount one donor may give each recipient per year without using lifetime exemption or filing a gift tax return. It is indexed for inflation and applies per donor per donee.

Stepped-Up Basis

Assets inherited at death take a basis equal to fair market value on the date of death, erasing prior capital gains. Lifetime gifts instead carry over the donor's basis.

Irrevocable Life Insurance Trust

A trust that owns a life policy so proceeds escape the insured's taxable estate. Transfers of existing policies face a three-year lookback, and the grantor cannot hold incidents of ownership.

Charitable Remainder Trust

An irrevocable split-interest trust paying income to the grantor or others for a term or life, with the remainder passing to charity. The grantor receives a charitable deduction.

Grantor Retained Annuity Trust

An irrevocable trust in which the grantor retains an annuity for a set term, with remaining appreciation passing to heirs. It freezes estate value if assets outperform the assumed rate.

Durable Power of Attorney

A document authorizing an agent to act on the principal's financial affairs, remaining effective if the principal becomes incapacitated. It operates during life and ends at death.

Probate Avoidance

Passing assets outside the probate court process through beneficiary designations, joint tenancy, transfer-on-death titles, or trusts. These transfers generally override the terms of a will.