All Flashcards
Code of Ethics
- CFP must act with honesty, integrity, competence, and diligence
- Act in client’s best interest
- Exercise due care
- Avoid/disclosure conflicts of interest
- Maintain confidentiality
- Act in a manner that reflects positivley on CFPs
Financial Planning Process
- Understand client’s personal/financial circumstances
- Identify/select goals
- Analyze client’s current course of action and potential alternatives
- Develop recommendations
- Present recommendations
- Implement recommendations
- Monitor progress
Documents that can be provided orally or in writing for financial ADVICE
Conflicts of interest Services/products How the client pays How firm/self are compensated Public discipline/bankruptcy Referral compensation arrangements Other material information
Documents that can be provided orally or in writing for financial PLANNING
ONLY conflicts of interest. All others must be in writing
Housing expenses (PITI) should reflect___
Housing expenses (PITI or rent) should reflect < 28% of gross income (most tested)
Total monthly debt should not exceed
Total monthly debt should reflect < 36% of gross income (maybe tested)
Real rate of return calculation
(1+after-tax return / 1+ inflation) -1 x 100
Securities Act of 1933
Prospectus is required before transaction
Securities Act of 1934
Regulates secondary market. Created SEC to enforce securities laws
Investment Company Act of 1940:
Authorized SEC to regulate UITs and managed investment companies
Investment Advisors Act of 1940
Defines role/responsibilities of investment advisor. Authorized SEC to monitor those who give advice
Securities Investors Protection Act of 1970
Established SIPC to insure against brokerage failures
Funding strategies for college
UTMA (Kiddie tax may apply)
EE Education Bonds (parents own bonds),
Coverdell ESA,
529
529 highlights
Eligible k-12 expenses as well as college,
no income limitation for contributions,
generally considered asset of parents,
$10k distribution per person for student loans
Coverdell highlights
Contribution is phased out for high income
irrevocable gift (cannot be reclaimed if not used for college)
$2k max per year,
can’t contribute past 18,
must be distributed by 30
Series EE Bonds highlights
Purchased in parents name,
must be redeemed in year expense is made;
Room and Board not qualified expense,
interest fully exempt from federal income tax
Two tax credits for education and what they are
American Opportunity Credit: Receive a tax credit based on 100% of first $2k plus 25% of next $2k for tuition, fees, course material. Can be claimed for first 4 years of post-secondary school. Cannot claim same year as Lifetime learning credit. Phaseout is $80-90k Single, $160-180k MFJ
Lifetime Learning Credit: Based on qualifying expenses paid by taxpayer, per period, for ALL eligible students (not per student). 20% of first $10k qualified tuition expenses. Can be used for courses to acquire/improve job skills. Phaseout is $59-69 single, $118-138 MFJ
Pell Grants
~$6k is max per year, only available to undergrads. Formula is Cost of Attendance-Expected Family Contribution= Financial Need
PLUS loans
Anyone can apply. Parents must meet federal standard of credit worthiness
Subsidized Stafford Loans
Available after EFC, Pell Grant, and other aid sources. Amount of loan is limited
% of parents unprotected assets, and expectation of kids contribution
Colleges expect 5.64% of parents “unprotected” assets toward EFC. Expect 20% of assets owned by student to be contributed
Divorces finalized by 12/31/18
alimony is deductible by payor and taxable to payee
Child support
Non-taxable to payee and non-deductible by payor
Fiscal Policy
federal taxation and spending designed to level out business cycle. Want to achieve full employment, price stability and sustained growth in the economy. Independent of monetary policy
Monetary Policy
Action taken by Fed to influence the growth of money supply
Reserve requirements
Level of reserves banks must maintain
Discount rate
Rate the fed charges to banks to meet reserve requirements. To tighten credit, fed increases this, to loosen, they lower
Leading economic indicators
Unemployment claims, new manufacturing orders, private housing units, stock prices, index of consumer expectations
Coincident indicators
Move in tandem with economy. Industrial production is big one
Recession/Depression
Recession is 2 quarters of decline in real GDP. Depression is 6 quarters
Yield Curve
Shows market rates of interest for bonds of different maturities with same credit rating
Reverse mortgage
available to homeowners 62 and older, no income qualification, proceeds are tax-free and can be used for anything
Chapter 11 Bankruptcy
For individuals who do not qualify for Chapter 13 because they exceed debt limit or do not have regular income
Chapter 13 Bankruptcy
Reorganization. Payments to creditors reduced. Creditors cannot harass. Debtor is not required to relinquish assets
Chapter 7
Permits debtor to claim either the federal exemption or exemption under state law. State law exemptions are homestead, limited amount of personal property, wages, limited equity in vehicle, pensions (ERISA plans), CV life insurance, property titled TIE
Debts not cancelable by bankruptcy
Student/gov’t debt, wage withholding/FICA obligations, child support/alimony
HO Section I coverage
- Coverage A (Dwelling): covers dwelling and anything attached (garage, deck, fence)
- Coverage B (Other structures): Separated from dwelling by clear space (pool, patio, garage)
- Coverage C (Personal Property): Covered anywhere in the world
- Coverage D (Loss of use): Applies for additional living expenses from damaged property (hotel for damaged property)
HO Section II coverage
- Coverage E (Personal Liability): Coverage where insured is responsible for bodily/property damage
- Coverage F (medical payments): Provides limited amount ($1k/$5k typically)/person for injury while on insured location
Basic Perils
WHARVES/FLT (Windstorm, hail, aircraft, riot, vandalism, vehicles, explosion, smoke, fire, lighting, theft)
Broad form
All of basic, plus PLUS RAF (Rupture of system, Artificially generated electricity, Falling objects, Freezing of plumbing)
Open Perils
Insurer agrees to pay for damage by any peril except those specifically excluded Usually appropriate choice on exam
HO-2 versus HO-3
HO3 is OPEN and much more comprehensive, HO2 is broad form
HO3 versus HO5
Contents are also covered under HO5
HO4
Renters policy
HO6
Condo Policy
Auto policies coverage
- A) Liability: Protects against judgements and covered exposures from bodily injury or property damage when insureds fault
- B) Medical Payments: Provides payment for reasonable and necessary medical expenses of insured due to auto accident. Has to be within 3 years.
- C) Uninsured motorist: Covers when uninsured motorist is at fault
- D) Damage to your auto
o Collision loss: The upset of your covered auto or its impact with another vehicle
o Other than collision: Open perils coverage for “other” category (breakage of glass, falling objects, fire, theft, contact with animal)
Medicare Part A
Hospital insurance protection (Part A)
o 65 and older are eligible
o Benefits:
Hospital stay: Subject to deductible for 60 days, then 2nd deductible for next 30 days and 3rd for another 60 days
Post hospital extended care (skilled nursing home) up to 100 days
Unlimited post-hospital home health services
Hospice
Additional blood donations AFTER 3 pints
o Outside US services not covered
Medicare Part B
Medical Insurance protection (Part B)
o Voluntary
o Pays 80% of approved charges with no stop-loss
o Benefits:
Doctor services such as house calls, office visits, nursing home visits
Diagnostic tests, blood transfusion, mental illness (limited), drugs that cannot be self-administered
Depression counseling, alcohol misuse, obesity
EXCLUDED
• Dental care
• Eye exams
• Prescription drugs
Health Maint. Organization (HMO)
- Gatekeeper: Care is managed by primary care physician who determines what is provided and what a specialist is needed for
- Disadvantage: Having to go thru gatekeeper, not covered when using provider other than HMO
Preferred Provider Organization (PPO)
- Differ from HMO in two major ways: Paid on a fee-for-service basis as needed. Employees are NOT required to use practitioners, can go outside network, but deductibles will be higher
Life Insurance dividend options
Cash option: Dividends paid in cash to policy owner (not taxable generally)
Reduction of premiums: Company subtracts amount of dividend from premium due and sends notice for remainder
Accumulated w/interest: Remain in account. Interest paid on dividends is taxable and dividends are added to death proceeds or to surrender value
Purchase paid-up additions: Dividends are used to purchase small amount of fully paid up whole life. Additions are added to policy face value to determine death benefit
One-year term: “Fifth dividend option”. Used to buy one year of term equal to policy base cash value
Nonforfeiture options:
Options for policyholder when they stop paying premium
Cash option: Policy can be surrendered for cash value less policy indebtedness
Reduced amount of: Face amount of policy will be reduced
Paid up term: Also called extend term. Cash value determines how long policy will be in place. No additional premiums due
A policy is defined as a MEC if…
- Entered into contract on or after June 21st 1988 AND
- Fails to meet “seven pay” test
o Excess premium has been paid within the first seven years of contract - A single premium policy issued after 1988 is always a MEC for exam purposes
Taxation of MECs
- Distributions are taxed under “interest first” rule
- Loan is treated as distribution
- If taxable dist. Received prior to 59.5, subject to 10% penalty
