Fin Planning Final Exam

This flashcard set captures key terms, definitions, and concepts related to risk management, insurance, tax planning, retirement planning, and estate planning, enabling effective review and preparation.

Risk Management

The identification, measurement, and treatment of exposures to potential losses.

Types of Exposures

Property damage, liability, and loss of income.

Risk Avoidance

Eliminating exposure entirely, such as not buying a car to avoid auto liability.

Risk Reduction

Reducing the probability or severity of loss, exemplified by using seatbelts.

Risk Retention

Absorbing losses personally, often unintentional, like paying for disability income loss yourself.

Risk Transfer

Shifting financial consequences to another party, typically by purchasing insurance.

Pure Risk

A risk where there is a possibility of loss or no loss; it is insurable.

Speculative Risk

A risk that involves the possibility of gain or loss; it is not insurable.

Peril

The cause of loss, such as fire.

Hazard

A condition that increases the likelihood of loss.

Primary Goal of Life Insurance

To compensate for the death of a household wage earner, reducing human asset risk.

Multiple-of-Income Method

Determines life insurance needs as 5-8 times the annual income.

Term Life Insurance Features

Fixed period, lowest cost, no cash value, renewable, convertible.

Whole Life Insurance

Provides lifetime coverage, level premiums, cash value accumulation, and forced savings.

Replacement Cost Rule

Must insure at least 80% of dwelling replacement cost to receive full reimbursement.

Auto Insurance Components

Bodily injury, medical payments, property damage, collision, uninsured motorist, comprehensive.

Umbrella Insurance Purpose

Provides excess liability coverage beyond standard homeowners and auto policies.

MOOP

Maximum Out-of-Pocket, including deductible and coinsurance.

COBRA

A law that allows employees to continue group health insurance coverage after leaving employment.

Medicare Eligibility Age

65 years and older.

Primary Objective of Tax Planning

To minimize taxes legally.

General Rule of Income Taxation

All accretions to wealth are considered income.

Adjusted Gross Income (AGI)

Gross income minus adjustments such as qualified plan contributions.

Indemnity

A principle ensuring the insured is restored to their financial position before the loss.

Actual Cash Value (ACV)

Replacement cost minus depreciation.

Replacement Cost Value (RCV)

The full replacement cost.

Types of Disability Insurance

Short-term (≤ 2 years) and long-term (to age 65).

Social Security Disability Coverage Limit

Must last for at least 2 years and includes a 5-month elimination period.

U.S. Tax System

A progressive tax system.

Marginal Tax Rate

The tax paid on the next dollar earned.

Average Tax Rate Calculation

Total taxes paid divided by total taxable income.

After-Tax Return Formula

After-Tax Return = Pre-Tax Return * (1 - Marginal Tax Rate).

Purpose of Clustering Deductions

To maximize itemized deductions by paying two years of deductible expenses in one year.

Benefit of Deferring Income

Allows for tax-free growth until funds are withdrawn.

Kiddie Tax

A tax preventing parents from shifting investment income to children under 19 or full-time students under 24.

Roth IRAs Funding

Funded with after-tax dollars.

Roth IRA Contribution Limit for 2025

$7,000.

Ordinary Income vs. Long-Term Capital Gains

Ordinary income is taxed at regular rates, while long-term capital gains are taxed at a lower rate.

Basis in Tax Terms

The unrecovered investment in an asset used to calculate gain/loss.

Section 199A

A provision allowing a 20% deduction on qualified business income.

Core Problem of Retirement Planning

Running out of money due to longevity risk.

Qualified Plans

Retirement plans meeting ERISA requirements and receiving favorable tax treatment.

Defined Benefit Plan

A retirement plan guaranteeing a specific benefit at retirement, with the employer bearing the investment risk.

Defined Contribution Plan

A retirement plan where benefits depend on individual account balances.

Early Withdrawal Penalty for Qualified Plans

10% before age 59½.

Deferred Compensation Plan

A nonqualified plan for high compensated employees to save beyond qualified plan limits.

Employee Stock Options Purpose

To retain and motivate employees by aligning their incentives with the company's stock price.

Three Types of Social Security Benefits

Benefits for retired workers, survivors, and disabled individuals.

TANSTAAFL Principle

There Ain't No Such Thing As A Free Lunch; every tax advantage has a tradeoff.

Charitable Giving Benefit in Tax Terms

Provides a charitable deduction and can eliminate capital gains tax on appreciated assets.

Capital Loss Offset Limit

$3,000 can offset capital gains in a year.

Rule for Capital Improvements and Basis

Capital improvements increase basis, while repairs do not.

60-Day Rule for Rollovers

Funds must be rolled over within 60 days to avoid taxes.

Tax-Advantaged Investments

Investments providing tax benefits, such as Roth IRAs and municipal bonds.

Retirement Plan for Large Stable Company

Money Purchase Pension Plan.

Retirement Plan for Startup with Volatile Profits

Profit Sharing Plan.

60-Day Rule for Rollovers

Funds must be rolled over to avoid penalties.

Key Exception to Early Withdrawal Penalty for IRAs

First-time home purchase.

Deferred Compensation Plans Definition

Nonqualified plans without ERISA limits, allowing high compensation savings.

Employee Stock Options Types

Incentive Stock Options (ISO) and Non-Qualified Stock Options (NQSO).

Social Security Start Date Considerations

Risk tolerance, longevity expectations, gender, current income needs, expected future tax bracket.

Advantages of Using Home as Retirement Asset

Mortgage interest and property tax deductions, capital gains exclusion, inflation hedge, and option to sell.

Reverse Mortgage

A loan allowing homeowners to borrow against their home equity while remaining in their home.

4% Withdrawal Rule

Withdraw 4% of retirement assets annually to maintain a 90% probability of lasting 30 years.

First Step in Simple Retirement Needs Analysis

Calculate the annual retirement shortfall: Expenses minus Retirement Income.

Estate Planning Definition

The process of managing assets while living and distributing them at death according to the owner's wishes.

Primary Objectives of Estate Planning

Minimize estate taxes and ensure assets are distributed to intended beneficiaries.

Will Definition

A legal document specifying asset distribution, executor, and guardians for minor children.

Probate Definition

The legal process involving estate asset identification, debt payment, and asset transfer.

Three Types of Estate Taxes

Estate tax, gift tax, and income tax.

Annual Gift Tax Exclusion for 2025

$19,000 per donee, per donor.

Trust Definition

A separate legal entity created by a grantor to manage assets for beneficiaries.

Using Trusts Advantages

Avoid probate, control distributions, creditor protection, and privacy.

Power of Attorney (POA) Definition

Legal authority to act on another's behalf, which can be financial, durable, or medical.

Irrevocable Life Insurance Trust (ILIT) Purpose

To remove life insurance from the estate and avoid estate tax on the death benefit.

Difference between Gift and Inheritance

A gift has a carryover basis, while an inheritance receives a FMV step-up basis.