LUTCF Course 3 flashcards

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

1035 exchange

A tax-free transfer of a life insurance policy or annuity to a new contract of like kind. Life-to-life, life-to-annuity, and annuity-to-annuity qualify; annuity-to-life does not.

Modified endowment contract

A life policy that fails the 7-pay test because premiums are front-loaded. Distributions are taxed LIFO and gains before age 59½ incur a 10% penalty.

Exclusion ratio

The portion of each annuity payment treated as a tax-free return of basis, computed as investment in the contract divided by expected return. Applies only during the payout period.

Attained-age conversion

A term conversion option that prices the new permanent policy using the insured's age at conversion rather than original age, resulting in higher premiums than original-age conversion.

Waiver of premium rider

A rider that pays the policy premium if the insured becomes totally disabled for a specified period, typically six months, keeping coverage in force at no cost.

Own-occupation disability

A disability policy definition that pays benefits when the insured cannot perform the material duties of their own occupation, even if they could work elsewhere.

Elimination period

The waiting period before disability benefits begin, usually 30 to 180 days. A longer elimination period lowers the premium because fewer claims are paid.

Coordination of benefits

A provision that determines payment order when two health plans cover the same person. The primary plan pays first and the secondary covers the remaining balance.

COBRA continuation

A federal law requiring employers with 20 or more employees to offer continued group health coverage for up to 18 months after termination, with the employee paying full premium.

ADL trigger

A long-term care benefit trigger requiring inability to perform at least two of six activities of daily living without assistance, or cognitive impairment requiring substantial supervision.

HSA contribution limit

The maximum annual amount that can be deposited into a health savings account, indexed yearly. For 2025 it is $4,300 self-only and $8,550 for family coverage.

Vesting schedule

The timetable by which an employee gains nonforfeitable rights to employer contributions. Common schedules are three-year cliff or two-to-six-year graded.

Required minimum distribution

The minimum amount that must be withdrawn annually from tax-deferred retirement accounts beginning at age 73, or 75 for those born in 1960 or later.

Safe harbor 401(k)

A plan design using a 3% nonelective contribution or 4% match that is exempt from ADP and ACP nondiscrimination testing, allowing highly compensated employees full deferrals.

Defined benefit plan

A retirement plan that promises a specific benefit at retirement, usually based on salary and years of service, with the employer bearing investment risk.

Social Security FRA

Full retirement age is 67 for people born in 1960 or later. Claiming at 62 reduces benefits by 30%; delaying to 70 increases them by 24%.

Rule of 72

A shortcut that estimates the number of years for an investment to double by dividing 72 by the annual rate of return, or estimates the required return by dividing 72 by years.

Duration

A bond risk measure expressing sensitivity to interest rate changes. A duration of 5 means the price falls about 5% for a 1% rise in rates.

Beta

A measure of a security's volatility relative to the market. A beta above 1 indicates greater volatility; beta measures systematic risk that diversification cannot eliminate.

Efficient frontier

A graph of portfolios offering the highest expected return for each level of risk. Portfolios below the frontier are inefficient because they offer less return for equal risk.

Qualified dividend

A dividend on stock held more than 60 days during the 121-day window around the ex-dividend date, taxed at long-term capital gains rates of 0/15/20%.

Asset allocation

The distribution of investments among asset classes such as stocks, bonds, and cash. It is the primary driver of portfolio return variability over time.

Annual gift exclusion

The amount one person may give another each year without gift tax consequences or use of lifetime exemption. For 2025 the limit is $19,000 per donee.

Portability

A provision allowing a surviving spouse to use the deceased spouse's unused estate and gift tax exclusion by filing a timely estate tax return at the first death.

QDOT

A qualified domestic trust that allows an unlimited marital deduction when the surviving spouse is not a U.S. citizen, deferring estate tax until distributions or death.

Step-up in basis

The adjustment of an inherited asset's cost basis to fair market value at the date of death, eliminating capital gains tax on appreciation during the decedent's lifetime.

ILIT

An irrevocable life insurance trust that owns a policy and removes death proceeds from the insured's taxable estate. Transfers of existing policies face a three-year lookback.

Buy-sell agreement

A contract among business owners specifying how a departing owner's interest is valued and purchased, often funded by life or disability insurance to ensure liquidity.

Key person insurance

Life or disability coverage purchased by a business on an essential employee. Premiums are not deductible, and death proceeds are generally received income-tax-free.

Executive bonus plan

An arrangement where the employer pays life insurance premiums as deductible compensation, while the employee owns the policy and reports the premium as taxable income.

Section 199A deduction

A deduction of up to 20% of qualified business income from pass-through entities, subject to W-2 wage limits and specified service trade restrictions at higher incomes.

Split-dollar plan

An arrangement splitting policy premium and benefit between employer and employee. The economic benefit regime taxes the employee on the value of current insurance protection.