LUTCF Course 3 key terms

A legal requirement that the person buying a policy would suffer genuine financial or emotional loss if the insured died. It must exist when the policy is purchased, not necessarily at death.

The owner holds all rights to a policy, including naming beneficiaries and surrendering it; the insured is the person whose life is measured. One person can hold both roles, or they can be different parties.

A life insurance contract where the owner is someone other than the insured, such as a business insuring a key employee or a spouse insuring a partner. Insurable interest and tax treatment must be examined carefully.

Renewable coverage with a death benefit and premium that stay fixed for a stated period, commonly 10, 20, or 30 years. It builds no cash value and usually ends or renews at sharply higher cost.

A term policy feature allowing the owner to exchange some or all coverage for permanent insurance without new evidence of insurability. Conversion deadlines and product choices are set by the contract.

Coverage designed to last the insured's lifetime, pairing a death benefit with accumulating cash value and typically a level or scheduled premium. Whole life, universal life, and variable life are common forms.

The savings component inside permanent policies, funded by premiums and credited interest or investment results, net of charges. It grows tax-deferred and is available through loans, withdrawals, or surrender.

Flexible permanent coverage separating the cost of insurance from a cash account credited with interest. The owner may vary premiums and death benefit within limits, but inadequate funding can cause the policy to lapse.

The mortality charge an insurer deducts, usually monthly, to pay for the pure death benefit protection in a universal life or similar policy. It rises as the insured ages and is separate from expense loads.

A borrowing against a permanent policy's cash value, secured by the contract and charged interest. Unpaid loans plus interest reduce the death benefit and can cause a policy to lapse.

The amount a policy owner receives upon canceling permanent coverage, equal to cash value less any surrender charges and outstanding loans. Early surrender often produces a substantially smaller payout.

Contractual choices available when a whole life owner stops paying premiums, such as reduced paid-up insurance, extended term insurance, or cash surrender. They protect the value already built in the policy.

A rider allowing part of the death benefit to be paid early when the insured is diagnosed with a terminal illness or qualifying condition. Proceeds are generally income tax free and reduce the final payout.

A contract that accumulates money and then pays it out over time, often for life, to protect against outliving assets. It may be immediate or deferred, fixed or variable.

The period before an annuity begins income payments, during which contributions earn interest or investment returns tax-deferred. Surrender charges and withdrawal rules often apply during this stage.

The irreversible conversion of an annuity's accumulated value into a stream of periodic payments, which can last for a set term or for life. Payment size depends on value, age, and the payout option chosen.

A fee imposed for withdrawing more than the allowed free amount from an annuity or cash value policy during early contract years. It typically declines annually until it disappears.

A contract clause permitting withdrawal of a set percentage, often 10 percent, of an annuity's value each year without surrender charges. It is frequently used to access income before annuitization.

A tax-advantaged account available to people enrolled in a qualifying high-deductible health plan, funded with pretax dollars, rolled over annually, and usable for qualified medical expenses. Contributions and withdrawals carry tax penalties when rules are broken.

A medical plan meeting statutory minimum deductibles and out-of-pocket limits, which makes the enrollee eligible to contribute to a health savings account. Preventive services are often covered before the deductible.

An employer-sponsored account funded with pretax salary reductions for medical or dependent care costs. It generally carries a use-it-or-lose-it rule, though limited carryover or grace periods may apply.

Rules determining which of two or more health plans pays first when a person is covered twice, preventing duplicate payment. The primary plan pays its normal share and the secondary considers the remainder.

Basic self-care tasks such as bathing, dressing, eating, toileting, transferring, and continence. Inability to perform a set number of them is a common trigger for long-term care benefits.

Coverage reimbursing or paying a daily benefit for custodial care in a home, assisted living facility, or nursing home. Benefits typically begin after a waiting period and require functional or cognitive impairment.

The waiting time, stated in days, that must pass after a disability or care need begins before benefits are paid. Longer periods lower premium because the insured absorbs more of the early cost.

A disability policy standard that pays benefits when the insured cannot perform the material duties of their specific occupation, even if able to work elsewhere. It is broader and more expensive than any occupation.

A stricter disability standard paying only when the insured cannot perform the duties of any occupation for which they are reasonably suited by training or experience. Insurers often apply it after an initial own-occupation period.

A partial benefit paid when the insured returns to work at reduced income because of disability, usually calculated as a percentage of lost earnings. It encourages rehabilitation and gradual return to work.

A retirement plan such as a 401(k) where contributions, not promised benefits, are defined, and the participant bears investment risk. The account balance at retirement determines the income available.

A pension promising a formula-based benefit at retirement, typically tied to salary and years of service, with the employer funding and bearing investment risk. Benefits may be insured by a federal guaranty program.

The timetable by which an employee earns a nonforfeitable right to employer contributions or pension benefits. Federal rules cap how long vesting may be delayed for most qualified plans.

The minimum amount that must be withdrawn annually from most tax-deferred retirement accounts after a statutory starting age. Missing a distribution triggers a substantial excise tax on the shortfall.

A personal retirement account funded with deductible or nondeductible contributions that grow tax-deferred, with withdrawals taxed as ordinary income. Eligibility to deduct contributions depends on income and workplace plan coverage.

A retirement account funded with after-tax dollars that grows and is withdrawn tax free when qualified conditions are met. It has no lifetime required distributions for the original owner and offers tax diversification.

An employer arrangement letting employees choose among cash and qualified benefits, such as health coverage and dependent care, using pretax salary reductions. It must be documented and satisfy nondiscrimination rules.

An investor's willingness and financial ability to accept investment losses in pursuit of higher returns. It shapes asset allocation and must be documented as part of suitability analysis.

Dividing a portfolio among asset classes such as stocks, bonds, and cash to balance risk and return. The mix is driven by goals, time horizon, and risk tolerance, and should be reviewed periodically.

Spreading investments across issuers, sectors, and asset classes so that any single loss has limited impact on the whole portfolio. It reduces specific risk but cannot eliminate market risk.

The requirement that a recommended product or strategy fit the client's objectives, financial situation, time horizon, and risk tolerance. It is documented through a client profile and rationale.

A legal obligation to act in the client's best interest, placing the client's interests ahead of the adviser's own. It includes duties of loyalty, care, disclosure of conflicts, and ongoing monitoring.

The court-supervised process of validating a will, paying debts and taxes, and distributing remaining assets to heirs. Assets passing by beneficiary designation or trust generally avoid it.

A legal document directing how probate assets are distributed and naming an executor and guardians for minors. It must meet state formalities and is subject to probate and potential contest.

Dying without a valid will, so state law determines who receives probate assets. The result may differ sharply from the deceased's wishes and can complicate guardianship and business succession.

A trust created during life that the grantor can amend or revoke, typically used to avoid probate and manage assets during incapacity. Assets must be retitled into the trust to be controlled by it.

A written authorization letting an agent act on another's financial or legal affairs, which may be durable and survive incapacity. It ends at death and does not replace a will or trust.

A federal estate tax rule allowing an unlimited transfer of assets to a surviving spouse who is a U.S. citizen, free of estate or gift tax at the first death. It defers rather than eliminates tax.

A timely election letting a surviving spouse use the deceased spouse's unused federal estate and gift tax exclusion. It requires a filed estate tax return and preserves shelter for later transfers.

The per-recipient amount a donor may give each year free of federal gift tax and without using lifetime exclusion. Gifts above it require a return, though no tax may be due.

Life or disability coverage a business owns on an essential employee, with the business as beneficiary, to offset losses from that person's death or disability. Premiums are generally not deductible.

A contract obligating a departing owner's interest to be sold and the remaining owners or the entity to buy it, setting price and funding terms. Life insurance is often used to fund the purchase at death.

A buy-sell structure in which each owner buys life insurance on the others and purchases a deceased owner's shares directly. It provides basis step-up for buyers but becomes unwieldy with many owners.

A buy-sell structure in which the business owns policies on each owner and redeems a deceased owner's interest. It is simpler with many owners but can create unfavorable tax results for the estate.

A structured questionnaire used to gather a client's goals, finances, obligations, and risk attitudes before making recommendations. It documents the basis for advice and supports suitability and compliance review.