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Additional CFP > All Topics > Flashcards

All Topics Flashcards

1
Q

Non-contributory plans

A

The employees do not contribute to the plan

  • Money Purchase Pension Plans
  • ESOPs
  • Profit Sharing Plans
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2
Q

Contributory plans

A

Employees are able contribute to the plan

  • 401(k)s
  • Thrift Plans
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3
Q

Maximum retirement benefit a participant in a Target-Benefit Plan can receive depends on

A

The value of the participant’s account at retirement

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4
Q

BD pension plans will have to increase funding costs associated with the plan if:

A
  • Low turnover rate
  • Early retirement
  • Salary scale assumption
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5
Q

Target Benefit Plans

A
  • Favors older participants
  • Requires actuarial assumptions
  • Maximum individual annual additions is the lesser of 100% of pay or $58,000
  • Employer limit is 25% of covered compensation
  • The only thing which actually determines the final retirement benefit in a target benefit plan is the account value at retirement.
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6
Q

Legal requirements apply to Employee Stock Ownership Plans (ESOPs)

A
  • ESOPs must permit participants, age 55+ and who have at least 10 years of service, the opportunity to diversify their accounts
  • Mandatory 20% withholding requirement does not apply to distributions of employer stock from an ESOP
  • Deductions for interest payments are not limited for ESOP plans
  • Deductions for repayment of principal is limited to 25% of covered compensation
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7
Q

Money Purchase Plan

A

Requires annual employer contributions equal to a formula determined by each participant’s salary

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8
Q

Defined Benefit Plan & Cash Balance Plan

A

Contributions are determined by:

  • Age
  • Salary
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9
Q

Profit Sharing plan

A

Doesn’t require annual contributions

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10
Q

SIMPLE IRA

A
  • Employer contributions are determined by the amount of employee deferrals
  • Maximum employer match = 3%
  • 25% penalty on early distributions if withdrawn within the first two years
  • Do not require 20% withholding because they are not qualified plans
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11
Q

Active participant

A

Employee who has benefited under one of the following plans through a contribution or accrued benefit during the year:

  • Qualified plan
  • Annuity plan
  • Tax sheltered annuity (403(b) plan)
  • Certain government plans (does not include 457 plans)
  • SEPs
  • SIMPLEs
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12
Q

Annual additions per participant to a DC Plan for the current year, maximum contribution is

A

The lesser of 100% of income or $58,000 (indexed).

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13
Q

What is the early withdrawal penalty for a SIMPLE IRA plan during the 2-year period beginning on the date the employee first participated in the SIMPLE plan

A

25%

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14
Q

457(b) Plan and 401(k) Plan

A

Contributions to a Section 457(b) plan do not count against the 401(k) plan limit. May contribute the maximum to each plan in the same year. Contribution limit to each plan is $19,500, therefore, he can contribute at total of $39,000 ($19,500 + $19,500).

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15
Q

Unit benefit (a.k.a. percentage-of-earnings-per-year-of-service) formula

A
  • Rewards many years of service
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16
Q

Flat-percentage formula

A
  • Work well, as long as the EE has ten years of service. The maximum benefits under IRC 415(b) are reduced for participation less than 10 years
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17
Q

Flat-amount formula

A
  • Provide higher benefits for younger EEs compared to older EEs on comparative basis
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18
Q

New comparability formula

A
  • Is a profit sharing plan
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19
Q

Possible disadvantage of a Simplified Employee Pension plan (SEP) for an employer

A

SEPs prohibit forfeitures

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20
Q

SEPs

A
  • Exclusion: EEs can be excluded from plan up to 3 years or age 21, whichever is longer
  • EE needs to earn only $650 to be included in the plan
  • Max contribution into a SEP is 25% or $20,000 per EE
  • Modification for owner would be: EE cont % / 1 + EE cont %
  • Not QP
  • DC Plan
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21
Q

Similarities between IRA and SEP

A
  • Individual ownership of the account.
  • All contributions into the account are fully owned by participant
  • Subject to early withdrawal penalties and minimum distribution regulations
  • All distributions from plan taxed as ordinary income
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22
Q

Defined Contribution Plan

A

Funding - 3% minimum to all eligible employees or less if less provided to the key employees.

  • ER deductibility limit of 25% of covered payroll
  • ER contributions must bear uniform resemblance to compensation and cannot discriminate in favor of highly compensated
  • ER contributions are not subject to any payroll related taxes
  • Can integrate with Social Security (sometimes called permissible disparity)
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23
Q

457 Plans

A
  • Churches are not qualifying sponsors of 457 plans
  • To avoid constructive receipt, agreement must be signed prior to the month the services are rendered and prior to receipt of the paycheck
  • Distributions are permitted at termination or normal retirement age as stated in plan document
  • Maximum elective deferral including catch-up: $39,000 for 2021, excluding catch-up: $19,500
  • Deferrals are subject to SS & Medicare taxes at the later of: performance of services or employee becomes vested
  • Periodic payments are treated as ordinary income
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24
Q

Payments under a “golden parachute”

A
  • Are ordinary income
  • Any amounts under the SS cap will be subject to OASDI tax
  • All amounts are subject to Medicare tax
  • Subject to additional 20% excise tax
  • Non-qualified plans
  • No lump sum treatment or IRA rollover options apply
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25
Q

Funding vehicles eligible (approved) for TSAs

A
  • Fixed Annuity Contracts
  • Mutual funds
  • Credit union share account.
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26
Q

(TSA) Tax Sheltered Annuity/403(b)

A
  • Is an EE deferral plan
  • Is not a qualified plan
  • Not subject to Federal/State Withholding tax
  • Salary reductions are subject to SS and Medicare taxes.
  • NOT exempt from all payroll taxes. They are still subject to SS and Medicare taxes
  • Phase-outs do not apply TSA plans
  • ER usually allow EE to control the allocation of assets within their TSA
  • EE’s benefit is always 100% vested
  • Long service catch-up: Deferral limit may be increased by up to $3,000 for EEs of Health, Education, Religious (HER) organizations who have completed 15 yrs of service and meet certain other requirements - max deferral may be as high as $29,000 ($19,500 deferral + $3,000 from the 15 year rule + $6,500 catch-up)
  • May not invest in any direct investments (fixed income securities)
  • Only EEs of public education systems and nonprofits can participate
  • Funded through EE contributions
  • Max loan: lesser of 50% of vested amount or $50,000 paid in quarterly (or more frequent) payments over 5 yrs, unless used for home purchase. It must carry reasonable interest rate
  • All assets in QP are part of the GE of the account owner
  • ERs may make matching contributions or contribute a fixed % of an EE’s compensation
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27
Q

Fringe Benefits

A
  • There must be at least one cash benefit
  • Only 25% of total benefits can accrue to key EEs
  • Deferrals are allowed only through a 401(k) plan
  • Mid-year changes in salary reductions are allowed only for qualified changes in status
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28
Q

Deferred Compensation (Other Stock Plans)

A
  • If EE left company today before meeting the vesting period EE would not be allowed to take a loss on W-2 income that was included in income in the year of grant
  • 83b election must be made 30 days after date the stock was initially transferred at grant
  • Holding period starts at the date of grant. When EE meets the vesting period EE would not have recognized anything because of the 83b election
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29
Q

If a stock option is vested when it is received, and has a readily ascertainable value it is:

A

Vested options are taxable based on the value of the option to the extent the Fair Market Value exceeds the option price.

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30
Q

Cash Balance Pension Plan

A
  • Plan is generally motivated by 2 factors: selecting a benefit design that EEs can more easily understand, and as a cost saving measure
  • Is a DB plan
  • Is subject to minimum funding requirements
  • Has guaranteed minimum investment return
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31
Q

Max benefit a participant in a target-benefit plan will actually receive depends on

A

Value of the participant’s account at retirement

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32
Q

Qualified Plans

A
  • IRS can get to assets in a qualified plan as well as spouses via a QDRO
  • All qualified plan assets are held in a tax exempt trust and all earnings are deferred from taxation until distributed from the plan
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33
Q

Profit Sharing Plan Vesting

A

Must vest at least as rapidly as:

  • 3-year cliff
  • 2 to 6 year graduated schedule without regard to the plan’s top-heavy status

Plan can follow any vesting schedule that provides a more generous vesting schedule.

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34
Q

Integration with Social Security is sometimes called

A

Permissible disparity

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35
Q

ISOs (Incentive Stock Options)

A
  • No regular taxable income will be recognized by the EE when the qualified option is granted or exercised
  • For favorable tax treatment the stock must be held 2 years from grant and 1 year after exercise
  • ER will be able to deduct the bargain element of the option as an expense if the sale is a disqualifying disposition
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36
Q

Group health insurance premiums

A
  • S Corps and Sole Props cannot deduct any premiums for group health insurance for owners
  • Premium paid by a partnership are passed through to the partner, who can deduct 100% of the costs on their individual tax return
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37
Q

De minimis exemption

A

Are not subject to a non-discrimination requirement because amounts are too small to make it worthwhile to account for the items

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38
Q

Cafeteria Plans

A
  • At least 1 taxable (typically cash) and non-taxable benefit must be offered under a plan
  • Medical FSAs allow reimbursement for eligible medical expenses for the employee and any dependents
  • Qualifying change in status is required to make a mid-year change in elections
  • Allow salary reductions which are taken from an EE’s salary before Federal and State withholding tax as well as SS and Medicare taxes (FICA)
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39
Q

Eligible non-taxable cafeteria plan benefits are:

A
  • Adoption assistance
  • Dependent care assistance
  • Group term life
  • Disability coverage
  • Generally can not include any plan that offers a benefit that defers an EE’s compensation, like a contribution to a retirement plan. However, it may include a qualified 401(k) plan (CODA) as an available non-taxable benefit (still subject to FICA)
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40
Q

Dues and licenses

A

Are excluded from taxable income if directly related to the employee’s job

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41
Q

Group survivor’s income insurance

A

A policy offering no choice of beneficiary

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42
Q

Employers provide benefits to employees for which of the following reasons

A
  • Assist EEs with needs which they otherwise may not be able to meet.
  • Reduce tax burden on EEs
  • Reduce tax burden on ERs
  • Attract and maintain quality EEs
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43
Q

QUALitative Information

A
  • Health
  • Life expectancy
  • Family circumstances
  • Values
  • Attitudes
  • Expectations
  • Earnings potential
  • Risk tolerance
  • Goals, needs, and priorities
  • Current course of action
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44
Q

QUANTitative Information

A
  • Age
  • Dependents
  • Other professional advisors
  • Income
  • Expenses
  • Cash flow
  • Savings
  • Assets
  • Liabilities
  • Available resources
  • Taxes
  • Employment benefits
  • Government benefits
  • Insurance coverage
  • Estate plans
  • Education and retirement accounts and benefits
  • Capacity of risk
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45
Q

Commercial General Liability contract includes

A
  • Coverage A, bodily injury & property damage liability
  • Coverage B, personal & advertising liability
  • Coverage C, medical payments
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46
Q

P&C: Full replacement cost

A

Requires the full value of the property be insured (the house burned to the ground).

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47
Q

P&C: Partial loss coverage

A

At least 80% of the value must be insured (some fire or water damage, not a full loss).

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48
Q

On homeowner policy forms where other structures are covered, the coverage is

A

Usually 10% of the dwelling

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49
Q

When a property claim has been submitted, the adjuster is called in to do which of the following:

A
  • Assist the insured in the preparing the proof-of-loss statement
  • Determine whether there was a loss covered by the policy
50
Q

Modified no-fault coverage

A

Plan where injured parties do not give up the right to sue, but simply refrain from such action until either a dollar threshold or a verbal threshold is reached.

51
Q

Characteristics of a Comprehensive Personal Liability (CPL) policy

A
  • It may be part of a standard ISO homeowners policy or a stand-alone policy

Not used to cover:

  • Errors & Omissions types of coverage requirements
  • Business pursuits
52
Q

Fine arts or antiques are insured under a homeowners policy

A
  • Generally insured on a homeowners policy with an endorsement known as a “personal articles floater” which is a form of Inland Marine insurance.
  • Coverage is provided on an appraised value
53
Q

Floods

A
  • Water damage done by water coming from the sky down (as in rain) is covered,
  • Water coming from the ground up (as in flood) is not covered
  • Personal auto policies cover floods
54
Q

The split limit

A
  • Is a per person, per accident amount

- Will be paid by the company to meet the insured’s liability

55
Q

Pure no-fault

A
  • There is no “pure no-fault” in existence in any state in the U.S.
  • Modified no-fault allows suits when verbal & dollar thresholds have been crossed
  • Dollar threshold is damage occurring above a certain amount, not a limit to actionable compensatory amounts.
56
Q

Limit Order

A
  • The price at which the trade is executed is more important than the timing
  • A limit order is most appropriate for stocks that are extremely volatile and are not frequently traded
57
Q

Stop Order

A
  • The price hits a certain level and turns to a market order
  • Stop order to sell: means that once the stop order price is reached, the stock is sold at that price or possibly less because it has become a market order
  • The primary risk is that the investor may receive significantly less than anticipated if the market is moving too quickly.
58
Q

Stop-Limit or Stop-Loss Limit Order

A
  • The investor sets two prices:
    • 1st price: stop-loss price. Once the price is reached the order turns to a limit order.
    • 2nd price: limit price. An investor will not sell below the second price.
  • The risk is that if the market moves quickly, the order may not fill and the investor will be left with the stock at a significantly lower price.
  • A stop-loss limit order: appropriate for investors with a significant gain built into the stock, but may not want to sell the stock during a period of significant volatility based on short-term news
59
Q

Short Selling

A
  • Selling first at a higher price, hoping to purchase the stock back at a lower price
  • Goal: sell high and buy low
  • An investor makes a profit when the asset’s price decreases in value
  • Is the opposite of taking a long position, where the investor anticipates making a profit when the price of the asset increases in value.
  • Investor must have a margin account to protect against any price appreciation of the stock
  • There is no time limit on how long an investor can maintain the short position
  • Dividends paid by a corporation must be covered by the short seller
60
Q

Standard Deviation

A
  • Standard deviation is a measure of risk and variability of returns.
  • The higher the standard deviation, the higher the riskiness of the investment.
  • In simple terms, measures how much something flip-flops around an average
  • Standard deviation can be used to determine total risk of an undiversified portfolio.
  • For purposes of the CFP® Exam, be prepared to do the following:
    • Use standard deviation to determine the probability of returns
    • Calculate standard deviation
61
Q

Coefficient of Variation

A
  • Useful in determining which investment has more relative risk when investments have different average returns.
  • Tells us the probability of actually experiencing a return close to the average return.
  • The higher the coefficient of variation the more risky an investment per unit of return

CV = Standard Deviation / Average return

62
Q

Mean Variance Optimization

A
  • Is the process of adding risky securities to a portfolio, but keeping the expected return the same.
  • It’s finding the balance of combining asset classes that provide the lowest variance as measured by standard deviation
63
Q

Covariance

A
  • Is the measure of two securities combined and their interactive risk. In other words, how price movements between two securities are related to each other
  • Covariance is a measure of relative risk
64
Q

Correlation/Correlation Coefficient

A
  • Correlation and the covariance measure movement of one security relative to that of another.
  • Covariance and correlation coefficient are both relative measures
  • Correlation ranges from +1 to -1 and provides the investor with insight as to the strength and direction two assets move relative to each other.
  • Correlation of +1 denotes that two assets are perfectly positively correlated.
  • Correlation of 0 denotes that assets are completely uncorrelated.
  • Correlation of -1 denotes a perfectly negative correlation.
  • Diversification benefits (risk is reduced) begin anytime correlation is less than 1.
65
Q

Beta

A
  • Is a measure of an individual security’s volatility relative to that of the market
  • Is best used to measure the volatility of a diversified portfolio. - It measures systematic risk dependent on the volatility of the security relative to that of the market.
    • The beta of the market is 1.
    • A stock with a beta of 1 will be expected to mirror the market in terms of direction, return, and fluctuation.
    • A stock beta higher than 1 means the stock fluctuates more than the market and greater risk is associated with that particular security.
    • A stock beta of less than one indicates that the security fluctuates less relative to market movements.
  • It should also be noted that the greater the beta coefficient of a given security, the greater the systematic risk associated with that particular security.
  • Measure of systematic risk or market risk, whereas standard deviation is a measure of total risk.
  • Is the slope of the line that represents a security’s return when plotted relative to market returns
66
Q

Characteristics of Government National Mortgage Association (GNMA) securities

A

GNMA is “on budget” agency debt. This means the pools of mortgages are backed by the full faith, credit, and taxing power of the U.S. government itself. The government backs the issue against default, NOT against investor loss through poor timing or poor choices. It should also be noted no U.S. government agency debt has ever defaulted.

  • The amount received by the investor each month may vary due to prepayment by homeowners
  • The realized yield on the certificates can be somewhat variable because of the principal prepayments
  • If mortgage rates decrease, prepayments may increase
67
Q

4 basic premises of Traditional Finance:

A
  1. Investors are Rational
  2. Markets are Efficient
  3. The Mean-Variance Portfolio Theory Governs
  4. Returns are Determined by Risk
68
Q

Investors are Rational

A

Investor decisions are:

  • Logical
  • Centered on a clearly defined goal and free from the unsteady influences of emotion or irrationality,
  • Take into account all available information.
69
Q

Markets are Efficient

A

At any given time, a stock’s share price in the market incorporates and reflects all relevant information about that stock.

Stocks are deemed at all times to trade at their fair value on stock exchanges.

70
Q

The Mean-Variance Portfolio Theory Governs

A

Investors choose portfolios by viewing and evaluating: mean returns and variance for their entire portfolios

71
Q

Returns are Determined by Risk

A

The CAPM is the basic theory that links return and risk for all assets by combining a risk-free asset with risky assets from an efficient market.

72
Q

Investors Are “Normal”

A

Normal investors have normal wants and desires, but may commit cognitive errors (through biases or otherwise).

Normal investors may be misled by emotions while they are trying to achieve their wants.

73
Q

Markets Are Not Efficient

A

There can be deviations in price from fundamental value so that there are opportunities to buy at a discount or sell at a premium. As a result, markets can be tough to beat, but they are not efficient.

74
Q

The Behavioral Portfolio Theory Governs

A

Investors segregate their money into various mental accounting layers. This mental process occurs when people “compartmentalize” certain goals to be accomplished in different categories based on risk rather than viewing their entire portfolio as a whole. This may result in having very different risk preferences for the same value depending on the goal or situation.

75
Q

Risk Alone Does Not Determine Returns

A

The Behavioral Asset Pricing Model determines the expected return of a stock using Beta, book to market ratios, market capitalization ratios, stock “momentum,” the investor’s likes or dislikes about the stock or company, social responsibility factors, status factors, and more

76
Q

What is the difference between a rational investor and a normal one?

A

Normal investors are prone to making cognitive mistakes due to their beliefs or cognitive biases.

77
Q

Affect Heuristic

A

Deals with judging something, whether it is good or bad. Do they like or dislike some company based on non-financial issues.

78
Q

Anchoring

A

Attaching or anchoring one’s thoughts to a reference point even though there may be no logical relevance or is not pertinent to the issue in question.

Also known as conservatism or belief perseverance.

Results in buying securities that have fallen in value because it “must” get back up to that recent high.

Represents the investor’s inability to objectively review and analyze new information

79
Q

Availability Heuristic

A

When a decision maker relies upon knowledge that is readily available in his or her memory, the cognitive heuristic known as “availability” is invoked. This may cause investors to overweight recent events or patterns while paying little attention to longer term trends.

80
Q

Bounded rationality

A

When individuals make decisions, their rationality is limited by the available information, the tractability of the decision problem, the cognitive limitations of their minds, and the time available to make the decision.

Decision-makers in this view act as “satisficers”, seeking a satisfactory solution rather than an optimal one.

One consequence of this concept is that having additional information does not lead to an improvement in decision making due to the inability of investors to consider significant amounts of information.

81
Q

Confirmation Bias

A

A commonly used and popular phrase is that “you do not get a second chance at a first impression.”

People tend to filter information and focus on information supporting their opinions.

82
Q

Cognitive Dissonance

A

The tendency to misinterpret information that is contrary to an existing opinion or only pay attention to information that supports an existing opinion.

83
Q

Disposition Effect

A

Also known as Regret Avoidance or “faulty framing” where normal investors do not mark their stocks to market prices.

Investors create mental accounts when they purchase stocks and continue to mark their value to purchase prices even after market prices have changed.

leads investors to take action or to refuse to act in hopes of minimizing any regret over their actions or inactions. In investments, it leads people to sell winners too soon and to hold on to losers too long

84
Q

Familiarity Bias

A

Investors tend to overestimate/underestimate the risk of investments with which they are unfamiliar/familiar.

85
Q

Gambler’s Fallacy

A

Investors often have incorrect understanding of probabilities which can lead to faulty predictions.

Investors may sell stock when it has been successful in consecutive trading sessions because they may not believe the stock is going to continue its upward trend.

86
Q

Herding

A

This cognitive bias is explained just by looking at the word. People tend to follow the masses or the “herd.”

87
Q

Hindsight Bias

A

Hindsight is looking back after the fact is known and assuming they can predict the future as readily as they can explain the past.

Is a form of overconfidence related to an investor’s belief that they had predicted an event that, in fact, they did not predict.

88
Q

Illusion of Control Bias

A

The tendency for people to overestimate their ability to control events; for example, it occurs when someone feels a sense of control over outcomes that they demonstrably do not influence.

89
Q

Overconfidence Bias

A

Usually concerns an investor that listens mostly to himself or herself, overconfident investors mostly rely on their skills and capabilities to do their own homework or make their own decisions.

This effect causes many investors to overstate their risk tolerance.

90
Q

Overreaction

A

A common emotion towards the receipt of news or information.

Leads to overtrading.

91
Q

Prospect Theory

A

Provides that people value gains and losses differently and will base their decisions on perceived gains rather than perceived losses.

Investors are “loss averse” and have an asymmetric attitude to gains and losses, getting less utility from gaining, say, $100 than they would lose if they lost $100.

This explains why investors may avoid higher risk investments even if they offer strong risk adjusted returns.

It also explains why they over insure against risks through low deductibles.

92
Q

Recency

A

Giving too much weight to recent observations or stimuli; for example, focusing on short-term past performance.

93
Q

Similarity Heuristic

A

Used when a decision or judgment is made when an apparently similar situation occurs even though the situations may have very different outcomes.

94
Q

Herd mentality

A

Is the process of buying what and when others are buying and selling.

Herd mentality leads to:

  • Buying high
  • Selling low
95
Q

Naïve diversification

A

Is the process of investing in every option available to the investor.

  • This is common with 401(k) or other employer sponsored retirement plans.
  • A plan participant thinks they are adequately diversified if they invest an equal amount in all the funds.
  • Also known as 1/n diversification.
96
Q

Representativeness

A

Is thinking that a good company is a good investment without regard to an analysis of the investment.

97
Q

Familiarity

A

Causes investment in companies that are familiar, such as an employer.
- Clearly this can cause devastating effects on a portfolio (e.g. Enron)

98
Q

Loss aversion

A

Suggests investors prefer avoiding losses more than experiencing gains.

An unwillingness to sell a losing investment, in the hopes it will turn around. - In other words, investors feel more pain from losses, than enjoying gains.

99
Q

Belief perseverance

A

Giving the most weight to the first information she encountered during her analysis

Evident when people are unlikely to change their views given new information

100
Q

Risk aversion

A

Not considered to be a behavioral bias

Is an assumption of traditional financial analysis based on the precepts of rational, utility-maximizing economic theory

101
Q

12b-1 fees

A

For marketing & distribution costs

102
Q

Dividend reinvestment plan (DRIP)

A

Program that allows investors to reinvest their cash dividends into additional shares or fractional shares of the underlying stock on the dividend payment date

Gives shareholders the option of reinvesting the amount of a declared dividend into additional shares, which are bought directly from the company. Because shares purchased through a DRIP typically come from the company’s own reserve, they are not marketable through stock exchanges. Shares must be redeemed directly through the company, also.

103
Q

Closed-end funds

A

Offer a limited number of shares

Offer no price guarantees and do not always sell at net asset value (NAV)

Shares of the fund are normally traded in major secondary markets.

Generally sell at either a premium or a discount to par value. When purchased at a discount, they afford investors an opportunity to realize up-side capital appreciation.

104
Q

Open-end funds

A

Continually create new shares as new monies are obtained

Passively and actively managed

Traded directly with the fund, not on the secondary market

105
Q

Characteristics of a municipal bond unit investment trust

A

Additional securities are NOT added to the trust.

The portfolio is self-liquidating.

Do not make additions to investments once the trust has been structured. Shares are not bought or sold after structuring and the portfolio is self-liquidating.

106
Q

Dollar-Cost Averaging (DCA)

A

Dollar Cost Averaging lowers average cost per share over a period of time (assuming share price fluctuations).

Investors put in the same dollar amount each month over time.

107
Q

Advantage of equity REITs over mortgage REITs

A

Equity REITs can participate in the appreciation of the underlying properties

108
Q

Which factors to consider when investing in a mutual fund?

A
  • The size of the fund.
  • The amount of time until a distribution is made.
  • The amount of time the current portfolio manager has managed the fund.
109
Q

Unit investment trust.

A

Passive management of the portfolios.

Self-liquidating investments usually holding bonds.

UIT typically holds municipal bonds until maturity. UITs can also own equities.

110
Q

Minimum margin

A

50%

111
Q

Immediate annuities

A

Are not subject to a premature distribution penalty tax (equal and substantial payments lasting the greater of 5 years or age 59 1/2 penalty exception covers immediate annuities).

112
Q

Residual benefits - Disability Insurance

A

Covers partial disability and duction in income if obliged to reduce her workload because of a less-than-total disability

113
Q

Disability Insurance Taxability

A

Employer paid policy on key employee = benefits taxable to employee

Employer paid policy on key employees = taxable benefits to employee. (ER paid & deducted premiums)

Business overhead expense policy = benefits are taxable but the premiums are tax deductible as a business expense
* Business overhead expense disability policy pays the insured’s business overhead expenses if the insured becomes disabled. The policy is designed for small businesses that rely on one or two persons.

Employer paid policy on employee with employer as beneficiary = not deductible to employer.

114
Q

Increased risk on a disability policy

A

Insurer will reduce coverage to match what the premium will purchase at the new, riskier position.

115
Q

Disability income insurance benefits terminate for the following reasons:

A
  • Insured has returned to work.

- Maximum benefit period has been reached.

116
Q

Split disability definition

A

‘Own occupation’ changing to ‘modified any occupation’.

At first, the insured is considered disabled if he/she cannot perform specific occupation. After a period of time (usually 2 to 3 years), the definition is broadened to include any occupation to which the insured is fit to undertake based education or training.

117
Q

Disability Income probation period

A

Time the insured must wait after the issue of the policy before specified conditions will be covered.

118
Q

Modified Any Occupation.

A

The insured is unable to perform the duties pertaining to any gainful occupation for which they are suited by education, experience, or training

119
Q

Misstatement of Age clause

A

Will cause the insurance company to simply pay the amount of death benefit proceeds that would have been correctly purchased at the age and premium amount that were paid.

120
Q

Approaches to calculate appropriate amount of

life insurance

A
  • Needs approach.
  • Multiple of earnings approach.
  • Income replacement method.
  • Human life approach.

Additional CFP (2 decks)

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