CFP Exam 2 Flashcards

Terms Definitions
National Association of Insurance Commissioners

*No legal Power
*Shares Ideas
*Seeks to Standardize state regulation
General Agent
Independent business people empowered by an insurance company to to sell and appoint agents in a specified territory.
Save X% of your gross income
Program for low income individuals. Federally created but mostly state run.
The Truth-In-Lending Act
Equal Credit Opportunity Act:
Prohibits discrimination based upon:
1) race
2) religion
3) national origin
4) color5) sex
6) marital status
7) age
8) receipt of certain types of income
The Lifetime Learning Credit is avaliable for how many years?
Gramm-Leach-Bliley Act (1999)
Repealed most of Glass-Stegall
Who is FINRA?
*Not a government agency
*Self regulatory agency
*Registered with the SEC
*If you want to sell certain products you will need to pass correlating FINRA exams
Step six of E.G.A.D.I.M.
Monitor the Plan

*Monitor progress
*Review changes in law
*Update client info
Step one of E.G.A.D.I.M.
Establish and Define Relationship:

*Explain the planning process
*Explain services provided
*Inform of docs required
*Clarify planner and client responsabilities
Step two of E.G.A.D.I.M.
Gather Info

*Use interview questions
*Determine goals, needs, priorities
*Get Docs
*Risk tolerance and time frame
*Determine Values and Expectations
What do most economists use to determine the phase of the business cycle?
unemployment rate
Monetary Policy
The Federal Reserve Bank (Fed) controls the supply of money enabling it to significantly impact interest rates
The six steps in the Financial Planning Process are:
1.Establishing the client-planner relationship
2.Gather client data and determine clients goals and objectives
3.Analyze Information and determine clients financial status
4.Developing and presenting the financial plan
5.Implementing the financial plan
6.Monitoring the financial plan

(Every Good Analysis Does Include Measuring)
The six steps in the Financial Planning Process are:
Inflows - Outflows =
Net Discretionary Cash Flow
Pre-existing conditions Clause
Excludes medical conditions for which were previously treated or which a prudent person would have sought treatment BEFORE coverage began.
Settlement Options for Life Insurance or Annuities
Lump Sum

Interest Option

Installments for a fixed Period

Installments for a fixed Amount

Life Income Options:
Straight Life
Life Income, period certain
Life Income with refund
Joint and survivor income
Viatical Agreement
Policy owner can sell their life insurance to a third party (or Viatical firm). Take estimated payout and subtract estimated premiums paid until that point and determine a value at which to sell the policy.
Internal Policy limits
Limits for specific illnesses or procedures that fall below policy overall benefits
Whole life insurance
provides guaranteed protection for the entire life of the insured

provides guaranteed nonforfeiture values that can be used as forced savings

Has a guaranteed level premium for life of the insured

death benefit guaranteed for life of insured

can be borrowed against

can be used for emergencies
Risk Avoidance
Staying Away from the risk activity all together. Use when risk is high in severity and frequency
Real GDP declines for more than two successive quarters
Perkins Loans
1) funded by Feds administered by schools
2) limit $4000 undergrads
3) limit $6000 grads
4) 5% w/ 9 mo grace period
Professional Corporation (PC)Definition:
1)Similar to commercial corperation - ownership is restricted to members of a certain profession
2) Continuity beyond death - trasnferred shares or bought up by PC
Limited Liability Company - (LLC)
1) owners (members) have limited liabilities for debts and claims of business even while participating in mgmt.
2) some states prohibit single member LLCs
Housing cost (PITI) should not exceed:
28% of Gross Income
Deferred Annuity
May be a spread of years between purchase and payments. May have a tax deferred gain.
Payment of an annual or monthly fee to providers (as opposed to a fee per service)
Life Insurance Rider:
Guarantied Insurability
Policy owner may purchase additional insurance at stated intervals with out providing proof of insurability.
Life Insurance Rider:
Spendthrift Clause
Meant to stop Beneficiaries from assigning $$$ from policy proceeds. However after the $$$ is theirs they can do with it what they please
What is Medigap?
A group of special policies designed by the NAIC and developed by commercial insurers and BC/BS as supplements to cover the gap between what medical care cost and what medicare pays.

Known as Medicare supplement policies, or the 10 NAIC designed plans
Refund Annuity
If there is value left at the Annuitants death, the remainder will be paid to a beneficiary (lump sum or installments)
What is the brochure rule?
Registered Investment Advisers must provide all clients (current and prospective) with a copy of the ADV(II) or something that is equivalent

Must be delivered at least 48 hours prior to entering into a contract, and every year there after (or at least an offer to deliver it)
Kiddie Tax
earned income in excess of $1,700 per year (2006) of a child under 14 is taxable at parents top rate
Depression is a prolonged and very severe recession
Bankruptcy - Chapter 11
Allowed to reorganize

Debtor remains in possession of assets subject to oversight of court
Section 2503(c) Minors Trust
*Allows the transferred trust property to be treated as if it were a gift of present interest to child
4 types of Medicare coverage
Part A: Hospital Coverage

Part B: Physicians and out of Hospital coverage

Part C: Medicare Advantage: Alternatives to traditional medicare coverage

Part D: Prescription Drug coverage
Paid up Dividend Additions
Also called (PUA's)

This allows for the purchase of additional net cost insurance!

Can be added on each year regardless of health or occupation.

No further Premiums are due on it, but it pays dividends!

Defers Taxes!

Best combination of increased death benefit AND cash value
S Corporation - Taxation:
1) IRS treats shareholders as partners
2) pro rata shares / flow through
3) avoid double taxation
Fiscal Policy
It is the influence on the economy by Federal Government through raises and lowering government spending and taxes
Margin cost
the cost to produce one more unit of product
Sole Proprietorship
Business owned by an individual who is personally liable for the obligations of the business
General Partnership - Tax forms required:
For 1065 to establish Schedule K-1 for each partner yearly
What are the four life cycle phases?
1) Accumulation
2) Consolidation
3) Spending
4) Gifting (may mirror spending phase)
PPI (Producers Price Index)
The US Dept of Labor measures wholesale cost of goods over a period of time
Reserve discount rate:
Adjusts discount rate which is the interest rate chanrged to member banks when they borrow money from the FED
Law of demand
the lower the price the more consumers will buy
Inelasticity is...
...when the economy and price has little effect on the demand for a product.
(Ex. food, medicine, tobacco)
Reserve Requirements:
Minimum amount that a bank is allowed to have in its reserves

The reserves have been remained at 10% since 1992
Consumer Credit Protection Act
1) must give "true" rate - APR
2) max liability for stolen CC - $50
3) 3 day right of recission
Important things to remember about budgets:
They can be mis-leading

Do not attempt 100% accuracy

Use budget to measure accomplishment
Family risk exposures when a primary income earner dies
1. Final expenses

2. Contingent Liabilities

3. Dependant Income

4. Education

5. Family Goals

6. Support of parents
Roles of an Adjuster
Determine if there was a loss covered by the policy
Handle settlement of certain losses
Limited pay whole life
Same as whole Life but premiums are higher and last for a shorter time period
Elements of an insurable risk
The loss must be measurable
The loss must be accidental or Fortuitous
What is the Current Ratio?
The current ratio measures a firms ability to pay off current debts with current assets (cash and equivalents, receivables, inventory)

Current assets / Current liabilities
Characteristics of an un-endorsed
HO 00 03
Open peril coverage on the dwelling
Broad form coverage on personal property
What are the steps of the Financial Planning Process
Establish and Define relationship, Gather Info,
Analyze and evaluate,
Develop, and present plan
Emergency Fund Planning:Real Estate
Is it liquid?
Is it marketable?
1) Considered illiquid because it may take a while to sell and asking price need to be lowered
2) Marketable because it is relatively easy to sell a house if priced below market value
Coverdell (ESAs) maximum contribution amount?
(on a per beneficiary basis, NOT account)
Cost of Capital
It is the internal measure of the cost to the company for borrowing from stockholders or outside creditors
National Association of Securities Dealers (NASD)
2) Started by securities industry in attempt to regulate self
3) anyone selling stocks and bonds
Insider Trading & Securities Fraud Enforcement Act of 1988
Amended Advisers Act of 1940
1) prevents misuse of material
2) non-public information by reg IA or anyone associated with him
Factors that SHIFT the supply curve include:
(a) Changes in resource prices
(b) Changes in technology
(c) Natural disasters
(d) other disruptive events
Equation for the Statement of Financial Position?
Assets - Liabilities = Net Worth
Prime Rate
What are the six categories of exceptions under the definition of Financial Advisor
1.Bank or bank holding co.

2.Lawyer, Engineer, Teacher etc. whose advise is incidental to their profession.

3.Broker or Dealer whose advise is incidental and non-compensated

4.Bona-fide News paper or Fin. Publication

5.only advise about securities issued and garunteed by the U.S. Gov.

6.Any others the SEC deems (none now)
Life and Period Certain Annuity
Payments made for the life of the annuitant, but guaranteed for a certain # of years regardless if the annuitant lives for the certain amount of years.
What is the purpose of underwriting?
Is the process of selecting and classifying risk.
What is the acid test ratio?
Similar to Current ratio, but take away inventory from the calculation.

Cash and equivalents, receivables /Current liabilities

Use to determine how easy it would be to pay off current liabilities with most liquid current assets
The effects on the Balance Sheet and Cash Flow Statement when cash is used in a transaction?
1)Cash outflows are increased(Cash flow statement);
2)a client's assets are increased(balance sheet); and/or
3)a cleint's liabilities are decreased(balance sheet)
S Corporation - Definition:
Corporation with LESS THAN or EQUAL TO 100 shareholders
1) All individuals (US no aliens)
2)Certain estates or trusts
3)NO partnerships or corporations as shareholders
4) no more than one class of stock
Life Insurance Rider:
Common Disaster Clause
In case of a disaster, if the insured dies and then the Beneficiary some time (up to 30 days later) it will be as if the beneficiary died first.

The goal is to not dis-inherit any contingent Beneficiaries.
What are some tools that will help gather risk info from a client?
1. Insurance policy checklist
2. Risk analysis questioner
3. Financial checklist
4. A review of the clients personal and
private activities
Investment Advisers Act of 1940 (EXCEPTIONS)
1) Bank or holding company that is not investment comp.
2) lawyer, accountant
Savings and Investment should equal at least:
5% to 10% of gross income
(not including reinvested dividend and income)
What are examples of things that increase / decrease Net Worth on balance sheet?
Shares of S&P 500 Index fund increse in value with market

Interest rates have a substatial increase and the client has a big bond portfolio
What does the term "client" denote?
A client denotes a person, persons, or entity who engages a practitioner and for whom professional services are rendered.
What is the Purpose of life insurance policy reserves?
To pay all future benefits or non-forfeiture values
What are the three (IAA) test to determine if one is an Investment Adviser or not
1. Are you Providing Advice?
2.Are you in the business of Giving advice?
3.Do you receive compensation for advice?
What are examples events which have NO impact (increase or decrease) of Net Worth?
"1. Paying off debt with cash (repayment of a loan using funds from a savings account)
2. Buying an asset with cash (purchase of an auto 75% financed and 25% down payment - addition of auto increases assets - 25% / down payment decreases cash - 75% / financing increases liabilities - again a wash"
How are assets and liabilties shown on a properly prepared Statement of Financial Position?
The respective TITLING of the assets and liabilities are shown to ensure accuracy for estate planning.
What is the definition of fair market value?
The IRS defines fair market value as the price that property will bring when offered for sale by a willing seller to a willing buyer, with neither being obliged to buy or sell.
How long can the HOPE Credit be taken? (2006)
1st & 2nd year of undergraduate studies

(Must be enrolled at least part-time)
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