RFP Module 4 flashcards

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

Net worth

Total assets minus total liabilities at a point in time. It measures accumulated wealth, not annual progress, and is the starting point of any financial plan.

Cash flow surplus

Income minus expenses, taxes, and debt payments over a period. A positive surplus funds savings and goals; a persistent deficit means the client is consuming capital or borrowing.

Rule of 72

Approximation of the years needed to double a sum: 72 divided by the annual percentage return. At 6% a sum doubles in roughly 12 years.

Real return

Nominal return adjusted for inflation, approximately nominal minus inflation. It shows the change in purchasing power and is used when goals are stated in today's money.

Emergency reserve

Liquid funds set aside for unexpected expenses, commonly three to six months of essential spending and up to twelve months for single or variable-income households.

Human life value

The present value of the insured's future earnings that would have supported dependents. It is one method for sizing a life insurance need.

Needs approach

Life insurance sizing method: present value of future needs such as income replacement, debts, education, and final expenses, minus existing financial resources.

Indemnity principle

Property insurance restores the insured to the pre-loss financial position, not better. Payment is limited by policy limits, deductibles, and any coinsurance requirement.

Coinsurance clause

Property policy condition requiring insurance equal to a stated percentage of value. Underinsurance reduces the claim proportionally: amount carried divided by amount required, times the loss.

Insurable risk

A risk is insurable when many similar exposure units exist, losses are accidental and measurable, catastrophic concentration is absent, and premiums remain affordable.

Term life insurance

Pure death benefit coverage for a stated period with no cash value. Premiums are lower than permanent insurance for the same face amount at the same age.

Disability benefit definition

The policy's test for paying a claim, usually own-occupation or any-occupation. Benefit is typically a percentage of pre-disability income after a waiting period.

CAPM required return

Required return equals the risk-free rate plus beta times the market risk premium. Beta measures the asset's sensitivity to movements in the overall market.

Sharpe ratio

Excess portfolio return over the risk-free rate divided by the portfolio's standard deviation. It measures return earned per unit of total risk taken.

Systematic risk

Market-wide risk that cannot be removed by diversification, such as interest rates or recessions. Investors expect a risk premium for bearing it.

Duration

A measure of a bond's price sensitivity to interest-rate changes. Longer duration means a larger percentage price move for a given change in yield.

Asset allocation

The split of a portfolio among asset classes such as equities, bonds, and cash. It is the primary driver of return variability over long horizons.

Risk tolerance components

Ability to take risk reflects financial capacity and time horizon; willingness reflects psychological attitude. When they differ, the lower governs the plan.

Nisab

The minimum wealth threshold that makes a Muslim liable for Zakat, commonly referenced at 85 grams of gold or 595 grams of silver.

Hawl

The lunar year of possession required before Zakat becomes due on most wealth. It applies to monetary and trade assets, not to agricultural produce at harvest.

Zakat base

Zakatable assets such as cash, gold, silver, trade inventory, and receivables, minus short-term liabilities due. The rate applied is commonly 2.5%.

Ushr

Zakat on agricultural produce, commonly 10% on rain-fed land and 5% on irrigated land, due at harvest rather than after a lunar year.

Marginal vs effective rate

The marginal rate applies to the next unit of income and drives planning decisions. The effective rate is total tax divided by total income and is lower under progressive rates.

After-tax return

Pre-tax return multiplied by one minus the applicable tax rate for fully taxable income. Investments should be compared on this basis, not on headline yields.

Intestacy

Distribution of an estate under statutory rules when there is no valid will. Shares follow the law rather than the deceased's wishes and may be inefficient.

Marital deduction

An estate tax deduction for property passing to a surviving spouse, deferring tax until the second death. Eligibility rules vary by jurisdiction.

Irrevocable life insurance trust

A trust that owns a life policy so proceeds avoid inclusion in the insured's estate, provided the trust is properly structured and the look-back period is respected.

Step-up in basis

A reset of an asset's cost basis to fair market value at death, eliminating capital gains on prior appreciation when the asset is later sold.

Probate

The court-supervised process of validating a will and transferring title to estate assets. Trusts and beneficiary designations typically pass outside it.

Replacement ratio method

Estimates retirement need as a percentage of pre-retirement income, often 70–80%. It is quick but less precise than itemizing expected retirement expenses.

Sequence-of-returns risk

The risk that poor investment returns early in retirement permanently deplete capital, even if the long-run average return is adequate.

Retirement capital need

The lump sum required at retirement, computed as the annual inflation-adjusted shortfall divided by a real return, treating the shortfall as a perpetuity in real terms.