LUTCF Course 3 cheat sheet

Life insurance proceeds paid to a named beneficiary are generally income-tax-free under IRC §101(a); any interest paid on delayed settlement is taxable to the beneficiary.

MEC test: a contract fails the 7-pay test if cumulative premiums exceed the level amount needed to fund the policy in 7 years; MEC distributions are taxed LIFO and pre-59½ gains incur a 10% penalty.

1035 exchange: life-to-life, life-to-annuity, and annuity-to-annuity transfers are tax-deferred; annuity-to-life and life-to-MEC transfers are not.

Annuity exclusion ratio = investment in the contract ÷ expected return; applies only during the payout period and only to non-qualified annuities.

Withdrawal ordering for non-qualified annuities is LIFO (gains first, then basis); for annuitized payments the exclusion ratio applies instead.

Cash value taxation: death benefit is income-tax-free, but gain above basis is ordinary income if the policy is surrendered; policy loans reduce the death benefit if unpaid.

Term converts to permanent coverage using attained-age or original-age rates specified in the contract; convertible term preserves insurability.

Underwriting classes: preferred best, preferred, standard, substandard; table ratings add a percentage to the base premium per table (e.g., Table 4 = +100%).

Riders: waiver of premium, accelerated death benefit, accidental death, child term, and guaranteed insurability; each adds cost and has specific trigger conditions.

Disability benefit period and elimination period are inversely related to premium: longer elimination period and shorter benefit period reduce cost.

Own-occupation definition pays if the insured cannot perform the material duties of their own occupation; any-occupation is a stricter standard.

Residual (partial) disability benefits typically pay a percentage equal to the loss of income, often with a minimum loss threshold (e.g., 20%).

Coordination of benefits: the primary plan pays first, the secondary plan pays the lesser of remaining balance or its own benefit; birthday rule applies to dependent children.

HSA eligibility for 2025: minimum deductible $1,650 self-only / $3,300 family; contribution limit $4,300 self-only / $8,550 family (plus $1,000 catch-up at 55+).

Medicare Part A covers inpatient hospital; Part B covers outpatient and physician services; Part D covers prescriptions; Part C (Medicare Advantage) combines A and B through private plans.

COBRA continuation: applies to employers with 20+ employees; coverage up to 18 months for termination or reduced hours, 29 months for disability, 36 months for dependents.

HIPAA guarantees renewability and portability; creditable coverage reduces pre-existing condition exclusion periods; group plans cannot exclude pre-existing conditions.

Long-term care insurance: benefit triggers are typically inability to perform 2 of 6 ADLs or cognitive impairment; tax-qualified policies require these triggers.

2025 limits: 401(k) elective deferral $23,500; catch-up $7,500 (age 50+); super catch-up $11,250 (ages 60-63); IRA limit $7,000; IRA catch-up $1,000.

Defined contribution plans shift investment risk to the participant; defined benefit plans shift risk to the employer with a promised benefit formula.

Vesting schedules: 3-year cliff or 2-to-6-year graded for employer contributions; elective deferrals are always 100% vested.

Social Security full retirement age is 67 for those born 1960 or later; claiming at 62 reduces benefit by 30%; delaying to 70 increases it by 24% above FRA.

Required Minimum Distributions begin at age 73 (born 1951-1959: age 73; born 1960+: age 75 under SECURE 2.0); Roth 401(k) RMDs are eliminated starting 2024.

Pension benefit formulas: flat benefit, unit benefit, and final average pay; integration with Social Security affects the benefit calculation.

401(k) ADP/ACP nondiscrimination tests; safe harbor plans (3% nonelective or 4% match) are exempt from ADP testing.

Profit-sharing and SEP plans: SEP contributions up to 25% of compensation, capped at $70,000 for 2025; SIMPLE deferral limit $16,500 with $3,500 catch-up.

Time value of money: FV = PV(1+r)^n; present value of an annuity uses the discount factor to compute retirement funding needs.

Risk-return tradeoff: higher expected return compensates for higher volatility; standard deviation measures total risk, beta measures systematic risk.

Modern portfolio theory: diversification reduces unsystematic risk; the efficient frontier plots portfolios with maximum return for a given risk level.

Bond pricing: prices move inversely to interest rates; duration approximates percentage price change for a 1% rate change.

Asset allocation drives most return variability; rebalancing restores target weights and enforces a buy-low/sell-high discipline.

Capital gains: long-term (held over 1 year) taxed at 0/15/20%; short-term taxed at ordinary income rates; qualified dividends receive long-term rates.

Rule of 72: divide 72 by the annual return to estimate years to double; divide 72 by years to estimate required return.

Mutual fund share classes: A shares carry front-end loads, B shares back-end loads with CDSC, C shares level loads; expense ratios differ accordingly.

Risk tolerance assessment combines capacity (financial ability) and attitude (willingness); both must be evaluated separately.

2025 federal estate and gift tax exclusion is $13,990,000 per person; portability allows a surviving spouse to use the deceased spouse's unused exclusion (DSUE).

Annual gift tax exclusion is $19,000 per donee for 2025; gifts above the annual exclusion count against the lifetime exemption.

Marital deduction: unlimited transfers to a U.S. citizen spouse qualify; non-citizen spouses require a QDOT to defer estate tax.

Step-up in basis at death applies to assets included in the gross estate; assets gifted during life carry over the donor's basis.

Irrevocable life insurance trust (ILIT) removes proceeds from the estate; the 3-year lookback applies if the insured transfers an existing policy.

Intestate succession: without a will, state law determines distribution; probate is the court-supervised process of validating the will.

Charitable remainder trust: income to donor for a term or life, remainder to charity; charitable lead trust reverses the flow.

Generation-skipping transfer tax applies to transfers to grandchildren or non-family members more than one generation below; exemption matches the estate exclusion.

Power of attorney and healthcare directives handle incapacity; a revocable living trust avoids probate but does not remove assets from the taxable estate.

Business continuation: buy-sell agreements funded by life insurance ensure orderly transfer of ownership at death, disability, or retirement.

Entity types: sole proprietorship, partnership, LLC, S-corp, and C-corp differ in liability, taxation, and fringe benefit deductibility.

Key person insurance protects the business against financial loss from the death of an essential employee; premiums are not deductible and proceeds are tax-free.

Executive bonus (Section 162) plan: employer pays premiums, deductible as compensation; employee owns the policy and includes premium in income.

Split-dollar arrangements: economic benefit regime taxes the employee on the value of current life insurance protection; endorsement vs. collateral assignment differ in ownership.

Qualified business income deduction (Section 199A): up to 20% of QBI for pass-through entities, subject to W-2 wage and specified service trade limitations.

Practice valuation methods: income approach (capitalized earnings), market approach (comparable sales), and asset-based approach.

Compliance: recordkeeping, suitability documentation, and continuing education requirements vary by state and product line.

Client relationship management: fact-finding, needs analysis, recommendation, implementation, and periodic review form the planning cycle.