From The Classes Flashcards
Requisites for an insurable risk are…
CHAD
Must note be Catastrophic for the insurer
Large number of similar Homogenous exposure units
Losses must be Accidental from an insured’s view
Losses must be Determinable (measurable)
Coinsurance Calculation
Amount of Coverage Purchased / Coinsurance x Loss - Deductible
(remember the coinsurance goes against the TOTAL REPLACEMENT value)
Typically if you transfer a life insurance policy, it’s taxable to the transferee to the extent that proceeds exceed basis. EXCEPTIONS TO THIS ARE:
Transferred to the
- insured
- business partner of the insured
- partnership of the insured
- corporation in which insured is a shareholder
- that results in a carryover basis from transferor to transferee
Inclusion / Exclusion ratio for non-qualified annuity payout
1) Monthly payment x 12 months x life expectancy = Total Payments
2) Basis / total payments = exclusion ratio
* This tells you how much of the basis you’re getting back tax free.
Taxation of Annuities (Pre & Post 1982)
Prior to 1982 = FIFO
After 1982 = LIFO
COBRA
- Must be offered if employer has 20 or more full time employees.
Coverage:
- 18 months for reduction in hours or normal termination
- 36 months for death, divorce, medicare eligibility
- 36 months for loss of dependency status by children of employee
- Up to 29 months if employee meets SS definition of disabled
Employees have 60 days to make a COBRA election
**Does not have to be offered if employer has less than 20 full time employees
Basic Named Perils
THE FRAWLS VVV
Fire Lightning Windstorm Hail Riot Aircraft Vehicles Smoke Vandalism Explosion Theft Volcano
Broad Named Perils
Basic Named Perils + FAS FWD
Falling objects Weight of ice, snow, sleet Accidental overflow of water (not flood) Sudden bursting of appliances Freezing of system of appliance Damage from electrical current
For a married taxpayer who is a participant in a qualified plan the phaseout range for 2020 is…
$104,000 – $124,000
The safe harbor provision in a 401(k) plan allows for what?
Immediate and full vesting in the first year of participation.
529 plans can now be used to pay for up to $______ per year for tuition at primary schools and $______ amount for qualified expenses at secondary schools.
$10,000
Unlimited
Social Security Tax Amounts
OASDI (up to $137,700 wage base in 2020)
- 6.2% employer
- 6.2% employee
Medicare (unlimited wage base)
- 1.45% to employer and employee
Additional Medicare tax of 0.9%
- On income in excess of $200,000 if single
- On income in excess of $250,000 if MFJ
Social Security Benefit Reduction & Increase
If retired before FRA:
- Benefit reduced by 5/9 for each MONTH for first 3 years
- Benefit reduced by 5/12 for each MONTH beyond 3 years
- QUICK TIP: If taking SS @62 and FRA is @70, it’s a 30% benefit reduction
If retired after FRA:
- Benefit increased by 8% each year
- Benefit increased by 2/3 of 1% each month
Social Security Beneficiaries
*Cannot collect more than one benefit.
Divorced Spouse of a covered worker:
- If age 62 AND
- Married to the worker for AT LEAST 10 YEARS and
- Did NOT re-marry
*If their benefit is higher than their ex-spouse, they will take their own personal benefit.
Medicare Part A
Covers where you’re AT.
- Hospital, skilled nursing, home health, hospice
- Does NOT cover custodial services (LTC still necessary)
Deductible is $1,408 per benefit period, 1st 60 days
Coinsurance:
- Days 21-100 = 176
- Days 61-90 = $352
- Days 91-150 = $704 (lifetime reserve days - total of 60)
Medicare Part B
DOES NOT COVER:
- Dental care, dentures
- Cosmetic surgery
- Hearing aids
- eye exams
- Initial preventative visit and annual wellness visits
Medicare Part C
“Medicare Advantage or Medicare Managed care Plan”
**Must have Part A & B to be eligible
Medicare Part D
DRUG COVERAGE
At what price does an investor receive a margin call?
LOAN / 1 - maintenance margin
Coefficient of Variation
CV = STD Dev. / Average return
The HIGHGER the Coefficient of Variation, the riskier the investment (not good).
Correlation Coefficient
Pij = COVij / (STD DEVi) (STD DEVj)
\+1 = Perfectly correlated -1 = Perfectly non-correlated 0 = 2 uncorrelated assets
Systematic Risks are…
PRIME
Purchasing Power risk Reinvestment Rate risk Interest Rate risk Market risk Exchange rate risk
Unsystematic Risks are…
ABCDEFG
Accounting risk Business risk Country risk Default risk Executive risk Financial risk Government risk
Treynor Index
Diversified because you’re using BETA
THE HIGHER THE BETTER
Holding Period Return Formula
HPR = selling price - purchase price +/- cash flows / initial equity
Arithmetic AVG VS Geometric AVG
Arithmetic AVG (Simple Average)
- Add the numbers up, divide by total number of numbers.
- Will be HIGHER than geometric.
Geometric AVG (time weighted) - Will ALWAYS BE LOWER than arithmetic
Dividend Payout Ratio Formula
DPR = common stock dividend / earnings per share
Is GNMA backed by the full faith and credit of the US?
YUP.
Convertible Bonds Conversion Value Formula
CV = (par / CP) x price per share
Do ADRs (American Depository Receipts) eliminate exchange risk?
NO
What is the Black/Scholes model used for and what are the variables?
Used to determine the value of a call opton.
Variables:
- Current price of underlying asset
- Time until expiration
- Risk free rate
- Volatility of the underlying asset
- Strike price
Are charitable contributions to political candidates, campaign committees, or foreign charities deductible?
NO. (Below the line)
Section 179
Can elect to immediately expense up to $1,040,000 of business tangible property placed in service during the year.
This limit is reduced dollar-for-dollar by the amount of Section 179 property placed into service that year in excess of $2,590,000
All qualified plans must pass which tests?
Must pass at least ONE of the following:
1) Safe Harbor
- 70% or more NHC covered
2) Ratio % Test
- % of NHC covered / % of HC covered = must be 70% or more
3) Average Benefits Test
- Average bene of NHC covered / average bene of HC covered & non-discriminatory test = 70% or more
What is the 50/40 test and what does it apply to?
Applies to Defined BENEFIT plans. DB plans must pass the SH, R% or AB tests first, and then the 50/40 test.
50/40 test = Plan must cover the LESSER of 50 employees OR 40% of employees.
Qualified Plan Vesting Schedules
Defined Contribution Plans
- Noncontributory = 2-6 year graduated or 3 year cliff
- Contributory (deferral) = 100% vested
Defined Benefit Plans
- 3-7 year graduated OR
- 5 year cliff
**Employer can always be more generous and shorten the vesting.
When do you know a plan is Top Heavy?
Defined Contribution
- Greater than 60% of ACCOUNT BALANCE attributable to key employees
Defined Benefit
- Greater than 60% of ACCRUED BENEFITS attributable to key employees
Who is a key employee?
- Greater than 5% ownership
- Greater than 1% ownership with comp in excess of $150,000
- Officer with comp in excess of $185,000
Who is a highly compensated employee?
- Greater than 5% ownership
- Compensation greater than $130,000 (unless elect and in top 20% of employees as ranked by salary
ADP Test
Actual Deferral Percentage Test
- Limits the employee elective deferrals for the HC based on the elective deferrals of the NHC. (ensures that the HC aren’t taking too much more of an advantage over the NHC)
IF ADP for NHC Employees is:
0-2%, then ADP for HC employees is 2x ADP for NHC
IF ADP for NHC Employees is:
2-8%, then ADP for HC employees is 2% + ADP for NHC
IF ADP for NHC Employees is:
8% and over, then ADP for HC employees is 1.25x ADP for NHC
10% Early W/D Penalty Execptions
Qualified Plans & IRAs
- 59.5
- Death
- Disability
- 72t
- Medical expenses in excess of 7.5% of AGI
- Federal tax levy
- $5,000 per taxpayer for birth or legal adoption
IRA Only
- Health insurance for unemployed
- Higher education costs
- First time home purchase up to $10,000
Qualified Plans Only
- Separation from service after age 55
- QDRO
What is earned income?
W2 income
Schedule C net income
Income as a general partner
Alimony from divorces prior to 12/31/18
