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how liabilities work | a liability is generally an obligation between one party and another that s not yet completed or paid a financial liability is also an obligation in the world of accounting but it s defined more by previous business transactions events sales exchange of assets or services or anything that would provide economic benefit at a later date liabilities are categorized as current or non current depending on their temporality they can include a future service owed to others such as short or long term borrowing from banks individuals or other entities or a previous transaction that s created an unsettled obligation current liabilities are usually considered short term they re expected to be concluded within 12 months or less non current liabilities are long term they re expected to last 12 months or longer the most common liabilities are usually the largest such as accounts payable and bonds payable most companies will have these two line items on their balance sheets because they re part of ongoing current and long term operations liabilities are a vital aspect of a company because they re used to finance operations and pay for large expansions they can also make transactions between businesses more efficient a wine supplier typically doesn t demand payment when it sells a case of wine to a restaurant and delivers the goods it invoices the restaurant for the purchase to streamline the drop off and make paying easier for the restaurant the outstanding money that the restaurant owes to its wine supplier is considered a liability the wine supplier considers the money it is owed to be an asset other definitions of liabilityliability generally refers to the state of being responsible for something the term can refer to any money or service owed to another party tax liability can refer to the property taxes that a homeowner owes to the municipal government or the income tax they owe to the federal government a retailer has a sales tax liability on their books when they collect sales tax from a customer until they remit those funds to the county city or state liability can also refer to one s potential damages in a civil lawsuit liability may also refer to the legal liability of a business or individual many businesses take out liability insurance in case a customer or employee sues them for negligence 1current vs non current liabilitiesit s a long term liability if a business takes out a mortgage that s payable over a 15 year period but the mortgage payments that are due during the current year are the current portion of long term debt they re recorded in the short term liabilities section of the balance sheet analysts ideally want to see that a company can pay current liabilities that are due within a year with cash some examples of short term liabilities include payroll expenses and accounts payable which can include money owed to vendors monthly utilities and similar expenses other examples include any liability that s not near term falls under non current liabilities that are expected to be paid in 12 months or more long term debt is also known as bonds payable and it s usually the largest liability and at the top of the list companies of all sizes finance part of their ongoing long term operations by issuing bonds that are essentially loans from each party that purchases the bonds this line item is in constant flux as bonds are issued mature or called back by the issuer analysts want to see that long term liabilities can be paid with assets derived from future earnings or financing transactions bonds and loans aren t the only long term liabilities that companies incur items like rent deferred taxes payroll and pension obligations can also be listed as long term liabilities other examples include liabilities vs assetsassets are what a company owns or something that s owed to the company they include tangible items such as buildings machinery and equipment as well as intangibles such as accounts receivable interest owed patents or intellectual property the difference is its owner s or stockholders equity if a business subtracts its liabilities from its assets the relationship can be expressed like this assets liabilities owner s equity text assets text liabilities text owner s equity assets liabilities owner s equitythis accounting equation is commonly presented this way however assets liabilities equity text assets text liabilities text equity assets liabilities equityliabilities vs expensesan expense is the cost of operations that a company incurs to generate revenue expenses are related to revenue unlike assets and liabilities both are listed on a company s income statement expenses are used to calculate net income the equation is revenues minus expenses it might signal weak financial stability if a company has had more expenses than revenues for the last three years because it s been losing money for those years liabilities are listed on a company s balance sheet and expenses are listed on a company s income statement expenses are the costs of a company s operation liabilities are the obligations and debts that a company owes expenses can be paid immediately with cash or the payment could be delayed which would create a liability example of liabilitieslet s look at a historical example using at t s t 2020 balance sheet 2 the current short term liabilities are separated from long term non current liabilities at t clearly defines its bank debt that s maturing in less than one year under current liabilities this is often used as operating capital for day to day operations by a company of this size rather than funding larger items which would be better suited using long term debt liabilities are carried at cost not market value like most assets they can be listed in order of preference under generally accepted accounting principle gaap rules as long as they re categorized the at t example has a relatively high debt level under current liabilities other line items like accounts payable ap and various future liabilities like payroll taxes will be higher current debt obligations for smaller companies ap typically carries the largest balances because they encompass day to day operations ap can include services raw materials office supplies or any other categories of products and services where no promissory note is issued most companies don t pay for goods and services as they re acquired ap is equivalent to a stack of bills waiting to be paid | |
how do i know if something is a liability | a liability is anything that s borrowed from owed to or obligated to someone else it can be real like a bill that must be paid or potential such as a possible lawsuit a liability isn t necessarily a bad thing a company might take out debt to expand and grow its business or an individual may take out a mortgage to purchase a home | |
how are current liabilities different from long term non current ones | companies segregate their liabilities by their time horizon for when they re due current liabilities are due within a year and are often paid using current assets non current liabilities are due in more than one year and most often include debt repayments and deferred payments 3 | |
what is a contingent liability | a contingent liability is an obligation that might have to be paid in the future but there are still unresolved matters that make it only a possibility not a certainty lawsuits and the threat of lawsuits are the most common contingent liabilities but unused gift cards product warranties and recalls also fit into this category | |
what are examples of liabilities that individuals or households have | an individual s or household s net worth is also arrived at by balancing assets against liabilities liabilities for most households will include taxes due bills that must be paid rent or mortgage payments loan interest and principal due the work owed may also be construed as a liability if you re prepaid for performing work or a service the bottom linea liability is anything you owe to another individual or an entity such as a lender or tax authority the term can also refer to a legal obligation or an action you re obligated to take both businesses and individuals can have liabilities your loan is a liability if you borrow money to purchase a car the portion of the vehicle that you ve already paid for is an asset financial liabilities can be either long term or short term depending on whether you ll be paying them off within a year | |
what is a liability driven investment | a liability driven investment ldi is an investment in assets that can generate the cash to pay for financial obligations liabilities this type of investing is common with defined benefit pension plans because companies and pension funds are obligated to provide the guaranteed income promised to the beneficiaries with the largest pension plans liabilities frequently climb to billions of dollars understanding liability driven investmentsthe goal of investing in ldis is to make sure that an investor with long term financial commitments such as a pension fund or insurance company has the income generating assets it needs to satisfy its financial obligations e g payouts to plan participants and customers making claims thus liability driven investing focuses on matching the cash flow generated by assets to the cash flow required by liabilities and then minimizing risks that could affect returns such as those associated with interest rate fluctuations and market volatility hedging strategies involving derivatives can be used to help reduce this risk because the objective of these portfolios is to generate income and mitigate risk the returns typically are lower than those offered by portfolios with a more aggressive higher risk approach to investing investment professionals who construct liability driven investment portfolios must examine their firm s or client s liabilities propose the right asset allocation select the appropriate investments and monitor the portfolios carefully being sure to make changes when necessary types of liability driven investmentsthese investments must be able to provide the income required by the liabilities as well as potential protection against interest rate risk market volatility and the risk posed by inflation types of liability driven investments include liability driven investing for individual investorsfor a retiree a liability driven investment strategy starts with estimating the amount of income they ll need for each future year all potential income including social security benefits is deducted from the yearly amount that the retiree needs any shortfall equals what the retiree will have to withdraw from their retirement portfolio annually the yearly withdrawals then become the liabilities that the ldi strategy must focus on the retiree must invest in a manner that provides the necessary cash flow accounting for extra or unexpected spending inflation and other incidental expenses that may arise the interest in liability driven investing took hold with urgency when more common investment strategies failed during the various financial upheavals of the early 2000s liability driven investing for institutional investorsfor an institution such as a pension fund or pension plan the focus must be placed on investments that generate enough cash flow to satisfy liabilities which are the payments guaranteed to pensioners and the strategy must include ways to minimize risk some strategies that involve mitigating risk and capturing greater returns could include duration matchingduration matching involves building a portfolio of assets with a duration that aligns with the duration of the liabilities if interest rates move in a direction that hurts the value of the assets that can be mitigated by the effect on the liabilities duration matching thus can help reduce the sensitivity of the portfolio s value to changes in interest rates immunizationimmunization takes another approach to duration matching with the same goal of mitigating the effect of a change in interest rates on the value of a portfolio and on an investor s liabilities interest rate hedgesinterest rate hedging involves the use of financial instruments such as financial futures or interest rate swaps to safeguard the value of a portfolio from the effect of interest rate movements for example an interest rate swap can exchange a fixed interest rate for a floating rate or vice versa to reduce a portfolio s exposure to changes in interest rates inflation hedgesto counteract the value eroding effect of inflation a portfolio can include investments such as inflation linked bonds real estate and infrastructure these are assets that can perform well during periods of increasing inflation and protect portfolio returns debt investmentsby including in a portfolio fixed income securities such as corporate bonds and other debt securities that have a higher risk than treasuries investors may be able to capture higher yields the objective of liability driven investments isn t necessarily a high return but rather a return from assets that matches the financial obligations of liabilities examples of ldi strategiesif an investor needs an additional 10 000 in income beyond what social security payments provide they can implement an ldi strategy by purchasing bonds that will provide at least 10 000 in annual interest payments alternately an investor can use an ldi approach that splits investment into two buckets one a fixed income investment for consistent returns and the other a higher risk equity investment the greater returns offered by equities could be moved into the fixed income allocation over time | |
how did liability driven investing start | it goes back to the day when defined benefit pension plans were in abundance and companies had to meet their financial guarantees to the beneficiaries of those plans who uses ldis in addition to pension funds other investors that use them include foundations endowments insurance companies and even individual investors who want to ensure guaranteed income for their retirement and manage investment risk | |
do liability driven investment portfolios usually include equities | they can be included depending on the investor s tolerance for risk but many portfolios don t have them due to their greater risk the main goal of an ldi is to match assets to liabilities and manage risk so that income is available to satisfy specific financial obligations investments that offer high returns can potential interfere with with goal if their risk is too great the bottom linea liability driven investment is an investment that can ensure that financial obligations can be met liability driven investing involves matching assets which produce cash flow to the liabilities requiring cash while individual investors can put ldi investing to good use a pension fund with billions of dollars of liabilities is a perfect example of the type of investor that most often employs it | |
what is liability insurance | liability insurance is an insurance product that provides protection against claims resulting from injuries and damage to other people or property liability insurance policies cover any legal costs and payouts an insured party is responsible for if they are found legally liable intentional damage and contractual liabilities are generally not covered in liability insurance policies unlike other types of insurance liability insurance policies pay third parties and not policyholders | |
how liability insurance works | liability insurance is critical for those who are liable and at fault for injuries sustained by other people or in the event that the insured party damages someone else s property as such liability insurance is also called third party insurance liability insurance does not cover intentional or criminal acts even if the insured party is found legally responsible policies are taken out by anyone who owns a business drives a car practices medicine or law basically anyone who can be sued for damages and or injuries policies protect both the insured and third parties who may be injured as a result of the policyholder s unintentional negligence liability insurance is also called third party insurance for instance most states require that vehicle owners have liability insurance under their automotive insurance policies to cover injury to other people and property in the event of accidents a product manufacturer may purchase product liability insurance to cover them if a product is faulty and causes damage to the purchasers or another third party business owners may purchase liability insurance that covers them if an employee is injured during business operations the decisions doctors and surgeons make while on the job also require liability insurance policies special considerationspersonal liability insurance policies are purchased primarily by high net worth individuals hnwis or those with sizeable assets but this type of coverage is recommended to anyone with a net worth that exceeds the combined coverage limits of other personal insurance policies such as home and auto coverage the cost of an additional insurance policy doesn t appeal to everyone although most carriers offer reduced rates for bundled coverage packages personal liability insurance is considered a secondary policy and may require policyholders to carry certain limits on their home and auto policies which may result in additional expenses the global liability insurance market size was valued at more than 25 billion in 2021 and is expected to reach 433 billion by 2031 1although commercial general liability insurance protects against most legal hassles it doesn t protect directors and officers from being sued and it doesn t protect the insured against errors and omissions companies require special policies for these cases including types of liability insurancebusiness owners are exposed to a range of liabilities any of which can subject their assets to substantial claims all business owners need to have an asset protection plan in place that s built around available liability insurance coverage here are the main types of liability insurance | |
how does personal liability insurance differ from business liability insurance | personal liability insurance covers individuals against claims resulting from injuries or damage to other people or property experienced on the insured s property or as a result of the insured s actions business liability insurance instead protects the financial interests of companies and business owners from lawsuits or damages resulting from similar accidents but also extending to product defects recalls and so on | |
what is umbrella insurance | an umbrella insurance policy is additional liability insurance coverage that is purchased and goes beyond the dollar limits of the insured s existing homeowners auto or watercraft insurance umbrella policies tend to be affordable and offered in increments of 500 000 or 1 million | |
what is backdated liability coverage | usually you must have liability coverage in place when an event happens that results in a claim backdated liability insurance however is insurance that provides coverage for a claim that occurred before the insurance policy was purchased these policies are uncommon and usually available only to businesses | |
what is a liar loan | a liar loan is a category of mortgage loan that requires little or no documentation of income because the lender does not verify income and assets by looking at w 2 forms income tax returns and other records such loans are said to be liar loans because lenders simply take the borrower at their word learn more about what a liar loan is and how it works | |
how a liar loan works | for certain low documentation loans such as stated income stated asset mortgages sisas income and assets are simply noted on the loan application on the other hand with no income no asset mortgages nina the lender doesn t even require you to disclose income and assets at all some liar loans take the form of ninja loans an acronym that means the borrower has no income no job and no assets these loan programs open the door for unethical behavior by unscrupulous borrowers and lenders and have been abused in the past they have resulted in borrowers taking on loans that they could not afford and facing foreclosure as a result 1low documentation and no documentation loans were originally designed for borrowers who have a hard time producing paperwork to verify their income and assets such as prior tax returns or else they might derive income from untraditional sources where such documentation is unavailable such as tips or a personal business low doc and no doc loans were meant to give individuals and households with nontraditional income sources the opportunity to become homeowners for example self employed individuals tend to not receive monthly pay stubs and might not have a consistent salary low documentation mortgages usually fall into the alt a category of mortgage lending alt a lending depends heavily on a borrower s credit score and the mortgage s loan to value ratio as tools to determine the borrower s ability to repay 2liar loans offer people with nontraditional income the opportunity to own property but they have been historically abused | |
how borrowers and brokers use liar loans | low doc and no doc loans are called liar loans because they open the door for abuse or lies when borrowers their mortgage brokers or loan officers overstate income or assets in order to qualify the borrower for a larger mortgage borrowers or brokers might do this in order to secure mortgages that would otherwise not be authorized the proliferation of liar loans was a contributing factor in the 2007 2008 financial crisis and housing bubble liar loans potentially accounted for 100 billion in losses or 20 of total losses registered during the crisis 3borrowers received approvals on mortgages that exceeded their ability to repay some mortgage brokers pushed these loans particularly prior to 2008 because the overall real estate market saw a significant run up in valuations in effect over speculation led to unscrupulous behavior often individuals who had no intention of repaying their mortgages were allowed to come into ownership of a residence after the financial crisis regulatory reforms such as the dodd frank wall street reform and consumer protection act put new constraints in place to deter and prevent such activity going forward the reforms required lenders to make a reasonable and good faith determination of a borrower s ability to repay any loan secured by a dwelling 4frequently asked questions faqs | |
is lying on a loan application illegal | if you lie on a loan application you could be committing a crime especially if it is an intentional lie you could potentially go to jail for lying on a loan application | |
what happens if you lie on a loan application | if you lie on an application to borrow money you can be rejected for the loan if the lender determines the information is false if you received funds for the loan and then the lender detects false information on your loan you may have to repay all the funds finally you could potentially go to jail for lying on a loan application depending on the circumstances 5 | |
are stated income loans illegal | stated loans or loans where you do not need to provide proof of your income are illegal today a stated loan is a loan in which you only state your income on your loan application the bottom linea liar loan is a loan in which the lender does not require proof that the borrower has met financial requirements instead the lender takes the borrower at their word when they provide information liar loans were once common among mortgage providers but now mortgage lenders must require more stringent proof the borrowers have met their criteria for credit score income and other factors | |
what is liar s poker | liar s poker is a betting game often associated with wall street traders it involves wagering on the frequency of digits appearing in the serial numbers of u s paper currency in each round players take turns proposing an ever increasing number of digits e g a sequence may involve three 5s three 6s four 5s etc the game proceeds until somebody calls out the previous proposal as being a lie if such a sequence exists e g there are four or more 5s between all the serial numbers held the person who announced the proposal wins if there are not that many i e there are only three 5s then the one who called out the hand wins liar s poker is also the title of a bestselling finance book by author michael lewis which is about bond trading at salomon bros in the late 1980s understanding liar s pokerliar s poker like the game poker itself relies on a mix of statistical reasoning chance and psychological tactics the rules are fairly similar to those of the card game cheat players hold randomly drawn dollar bills with close attention to the serial numbers on their respective bills the objective of the game is to bluff opponents into believing that your bid does not exceed the combined sum of all of the serial numbers among the bills in play in liar s poker if one proposes say three fours they are predicting that among all of the dollar serial numbers held by all players there are at least three fours if the player s bluff is not called the next player must either bid a higher frequency of any other digit five twos or can bid a higher number at the same frequency level three sixes the game continues until somebody thinks the prior player is lying and calls the bluff if correct the one who called the bluff wins if not the player who proposed the sequence wins strategies used in liar s pokerthe number of players in the game can affect the probability of winning though the game itself largely rewards and benefits those who employ deception and trickery to win rather than merely bidding as accurately as possible the players are taking turns at coaxing their rivals to make a mistake as they play the rules of the game require bids to continue escalating thereby increasing the game s stakes with more than two players it is a frequent strategy to continue to raise the bid given the likelihood of being challenged and the related likelihood of losing when challenging the strategy relies on continuous bluffing in hopes of potentially winning if you or someone you know has a gambling problem call the national problem gambling helpline at 1 800 522 4700 or visit ncpgambling org chat to chat with a helpline specialist 12 | |
what is libel | libel involves the act of publishing a statement about an individual either in written form or by broadcast over media platforms such as radio television or the internet that is untrue and threatens to harm the reputation and or livelihood of the targeted person libel is considered a civil wrong tort and can therefore be the basis of a lawsuit libel is often compared with slander which refers to unwritten or unpublished defamatory speech understanding libellibel represents the published or broadcasted version of defamation defamation occurs when an individual s words damage another person s reputation or tarnish their ability to earn a living persons who commit libel can be subjected to civil and in the past criminal penalties 1in the u s libel was once considered an area of unprotected speech not covered by first amendment freedoms along with obscenity and fighting words this changed over the course of the 20th century as court decisions began to favor free speech over the protection of those damaged by potentially defamatory speech 1the offending statement in question must purport to be factual and not opinion based 2 this is generally a strong defense but this does not mean that by simply preceding a statement with the words i think an individual is safeguarded from the possibility of committing libelous actions for example if someone wrote and published the sentence i think sam murdered their spouse that individual is nonetheless vulnerable to libel even though this statement was technically framed as a belief indeed this phrase suggests that the individual had a solid basis in which to believe that the statement is factual proving libelfor someone to be found guilty of committing libel the target of the offending comments does not necessarily have to claim to be harmed as the result of the published statement several types of defamatory statements are considered damaging in themselves regardless of whether they can be shown to have resulted in actual harm these include allegations of criminal activity statements that someone has a contagious disease accusations of sexual misconduct and allegations of unprofessional or improper business conduct separately it is generally more difficult for public figures to sue for libel than it is for private parties to bring legal action in the wake of similar comments this is mainly due to a decision by the u s supreme court requiring the libel to demonstrate actual malice in order for a public figure to sue 31 modest factual inaccuracies such as incorrectly stating a person s age height or weight do not constitute libelous activity lastly truth is recognized as a complete defense against complaints of defamation depending on the jurisdiction a defamatory statement may be presumed to be false in which case the defendant can raise an affirmative defense if they can show it is substantially true or the burden may be on the plaintiff to that an allegedly defamatory statement is in fact false in order to prove their claim either way a true statement can be protected against claims of defamation 4two current members of the supreme court namely justices thomas and gorsuch have indicated that the sullivan decision should be reconsidered 5 this landmark case from the 1960s revolved around ads placed in the new york times urging readers to contribute to a legal fund for martin luther king jr but which contained several small inaccuracies the court ruled that the times was not committing libel instead the court decided that the target of a libel claim must show that it was made with prior knowledge or reckless disregard for its false claims 6 scholars have argued that the sullivan case affirmed freedom of the press and paved the way for the civil rights movement differences between libel and slanderthe chief difference between slander and libel is that the former involves defamatory speech while the latter focuses on defamatory writings interestingly although defamatory content presented on websites was originally considered to be libelous and not slanderous that view has shifted largely due to the english courts which opine that internet content is more commensurate with speech than it is with traditional print media from a strictly legal perspective defamatory comments are not actionable unless they are properly published unfortunately for ill intended bloggers the term published in the context of internet communication legally means that merely a single individual must read the offensive blog in question consequently a webmaster may be sued for libeling someone by trashing their reputation on a personal blog if only their best pal a colleague or a family member consumes the defamatory words of course personal blogs are typically far less trafficked than mainstream websites such as the bbc news official site and other large platforms therefore that first group is more apt to get away with the defamation not only because the words may slip by unnoticed but also because the target of the libel may be reluctant to file suit against the offending blogger lest a public court case bring even more attention to the slurs in question | |
why is broadcast speech libel if it is not written | even though broadcast media e g tv or radio typically involves spoken words without text it is nonetheless considered libel because according to the law this is because broadcast media has the capacity to reach large audiences just as written words do making it less temporary 1can you be guilty of libel ii you leave disparaging or negative comments online if a defamatory or damaging statement is written and posted online such as via a blog post or through social media it may be considered libel if so the one who committed the libel could be prosecuted while not yet common there is increased concern that negative online reviews may end up constituting libel can opinions be libel no statements of opinion e g i think that are protected speech and cannot be prosecuted as libel unlike a statement of fact | |
what is a liberty bond | a liberty bond is a debt obligation issued by the u s department of the treasury in conjunction with the federal reserve also known as a liberty loan it was a war bond issued in four installments in 1917 18 as a means to finance the u s participation in world war i and the allied war effort in europe 1the u s government helped sell liberty bonds again after the terrorist attacks in the united states on september 11 2001 this time to finance the rebuilding of ground zero and other damaged areas understanding liberty bondsliberty bonds were launched by an act of congress known as the liberty bond act later dubbed the first liberty bond act since there were three subsequent acts to authorize additional bond issues plus a fifth post war round with this program americans basically loaned the government money to help pay for the costs of wartime military operations after a certain number of years those who invested in these bonds would receive their money back plus interest the government created these bonds as part of what was known as the liberty loan program a joint effort between the u s treasury and the federal reserve system which had been created just three years earlier in 1914 the federal government promoted these securities as a way for u s citizens to show their patriotic spirit and support the nation and its military however liberty bonds were only moderately successful when first issued in april 1917 to the embarrassment of the treasury department the government to ensure the bonds were more successful the next time organized a massive public awareness campaign using eye catching posters billboards endorsements from movie stars and other promotional tactics for the second offering of liberty bonds in late 1917 1a final fifth release of liberty bonds occurred in april 1919 only they were dubbed victory bonds to celebrate the end of world war i liberty bonds as investmentsthe first issue of liberty bonds offered an interest rate of 3 5 which was lower than that available through a typical savings account at that time over the course of several subsequent releases the interest rate gradually increased slightly up to 4 25 3 still the primary appeal of these securities was to show patriotic support and not for financial gain nevertheless liberty bonds offered many ordinary americans their first experience with investing up to then securities were seen as something for the very rich or professional wall street traders but the then secretary of the treasury william gibbs mcadoo envisioned the entire bond program as something of a financial educator as well as of patriotism booster for the average individual the amount raised by liberty bonds sold during world war i 3bonds were available in denominations as low as 50 they could also be bought in installments via 25 cent war thrift stamps and 5 war savings certificates which eventually could be turned in for an actual liberty bond mcadoo also set the bonds interest rate relatively low to prevent them from being snapped up by the well to do and by speculators one economic advantage of the first issue of liberty bonds was that the interest was exempt from taxes except for estate or inheritance taxes though they had terms of 25 to 30 years most of the liberty bonds issued during the early rounds were cashed in or converted to bonds offering a higher interest rate they were redeemable after 10 or 15 years as a result those bond certificates are rare and valued by collectors liberty bonds in the 21st centuryliberty bonds re emerged in the early 2000s although these obligations were somewhat different animals not federal treasury bonds but new york municipal bonds jointly issued by the new york city housing development corporation and the new york state housing finance agency from 2002 2006 with a 1 2 billion contribution from the federal government these private activity bonds were intended to help rebuild the part of lower manhattan dubbed the liberty zone that had been devastated by the world trade center terrorist attacks on sept 11 2001 the 8 billion issue had a different target audience too real estate developers and corporations and a different aim to finance not a war effort but residential and commercial buildings critics charged the program went to help high profile corporations the bonds were triple tax exempt and in many cases towards projects that weren t even located near ground zero yet they did spur a building spree in downtown manhattan which today is a more populated thriving area than it ever was | |
what is the libor curve | the libor curve is the graphical representation of the interest rate term structure of various maturities of the london interbank offered rate commonly known as libor libor is a short term floating rate at which large banks with high credit ratings lend to each other the libor curve depicts the yield curve for short term libor rates of less than one year the transition from libor to other benchmarks such as the secured overnight financing rate sofr began in 2020 1 understanding the libor curvelibor is one of the world s most widely used benchmarks for short term interest rates it serves as a primary indicator for the average interest rate at which contributing banks may obtain short term loans in the london interbank market the libor curve plots rates against their corresponding maturities the libor curve typically plots its yield curve across seven different maturities overnight spot next s n one week one month two months three months six months and 12 months a yield curve is a line that plots yields interest rates of bonds having equal credit quality but differing maturity dates the slope of the yield curve gives an idea of future interest rate changes and economic activity there are three main types of yield curve shapes normal upward sloping curve inverted downward sloping curve and flat although not theoretically risk free libor is considered a good proxy against which to measure the risk return tradeoff for other short term floating rate instruments the libor curve can be predictive of longer term interest rates and is especially important in the pricing of interest rate swaps criticism of the libor curveabuse of the libor system for personal gain was uncovered in the wake of the financial crisis that began in 2008 massive dislocations in global banking enabled individuals working at contributor banks to manipulate libor rates in 2013 the financial conduct authority fca of the u k took over the regulation of libor as of december 2020 plans were in place to phase out the libor system by 2023 and replace it with other benchmarks such as the sterling overnight index average sonia 1 | |
what is the libor scandal | the libor scandal was a highly publicized scheme in which bankers at several major financial institutions colluded with each other to manipulate the london interbank offered rate libor the scandal sowed distrust in the financial industry and led to a wave of fines lawsuits and regulatory actions although the scandal came to light in 2012 there is evidence suggesting that the collusion in question had been ongoing since as early as 2003 many leading financial institutions were implicated in the scandal including deutsche bank db barclays bcs citigroup c jpmorgan chase jpm and the royal bank of scotland rbs as a result of the rate fixing scandal questions around libor s validity as a credible benchmark rate has arisen and it is now being phased out according to the federal reserve and regulators in the u k libor will be phased out by june 30 2023 and will be replaced by the secured overnight financing rate sofr as part of this phase out libor s one week and two month usd libor rates will no longer be published after december 31 2021 1understanding the libor scandalthe libor is a benchmark interest rate that is used for the pricing of loans and derivative products throughout the world it is formed using reference interest rates submitted by participating banks during the libor scandal traders at many of these banks deliberately submitted artificially low or high interest rates in order to force the libor higher or lower in an effort to support their own institutions derivative and trading activities the libor scandal was significant because of the central role libor plays in global finance the libor is used to determine everything from the interest rates that giant corporations will pay for loans to the rates individual consumers will pay for home mortgages or student loans it is also used in derivative pricing therefore by manipulating the libor the traders in question were indirectly causing a cascade of mispriced financial assets throughout the entire global financial system understandably this led to a substantial public backlash as parties throughout the world wondered whether they may have been harmed financially public outrage at the scandal was further exacerbated by the apparent brashness of many of the actors involved this became evident as emails and phone records were released during investigations evidence showed traders openly asking others to set rates at a specific amount so that a particular position would be profitable regulators in both the united states and the united kingdom levied some 9 billion in fines on banks involved in the scandal as well as a slew of criminal charges because libor is used in the pricing of many of the financial instruments used by corporations and governments they have also filed lawsuits alleging that the rate fixing negatively affected them example of the libor scandalalthough it is difficult to know whether any particular person was affected by the libor scandal there are many potential ways in which its impact could have been felt for example individual homeowners may have initiated fixed rate mortgages at a time when mortgage rates were artificially lifted based on upward manipulation of the libor from the homeowner s perspective every dollar of additional expense caused by the artificially high rates could be seen as a kind of theft being committed by the libor rate fixers similarly many traders who were party to derivative contracts would have experienced unnecessarily severe losses as a result of the libor scandal ultimately the libor scandal left many changes in its wake following the exposure of the libor collusion britain s financial conduct authority fca took the responsibility for libor supervision away from the british bankers association bba and turned it over to the intercontinental exchange s benchmark administration iba the iba is an independent u k subsidiary of the private u s based exchange operator intercontinental exchange ice libor is now commonly known as ice libor more recently the fca has announced that it will support libor only until 2021 at which point it hopes to transition to an alternative system the new york federal reserve launched a possible libor replacement in april 2018 called the secured overnight financing rate sofr which is based on short term loans observed in the repo market unlike the libor there s extensive trading in treasury repos roughly 1 500 times that of interbank loans as of 2018 theoretically making it a more accurate indicator of borrowing costs moreover the sofr is based on data from observable transactions rather than on estimated borrowing rates as is sometimes the case with libor | |
what is a licensee | a licensee is any business organization or individual that has been granted legal permission or certain rights by another entity who owns certain assets to engage in any activity related to these assets the permission or license can be given on an express or implied basis licensees will compensate the owner of the license via an upfront payment ongoing fees royalties or some other revenue sharing arrangement understanding licenseesa licensee has received legal permission from another party to conduct some sort of business over which the other party holds some control ownership or authority the licensee may pay outright for this permission known as a licensing fee or may make payments based on the results of the business arrangement known as licensing revenue a licensee may pay the licensor for the permission or share revenue arising from activities arising from the permission many variations on the licensing relationship exist in the business world musical performances recordings and broadcasts often contain royalty agreements for licensing music software programs may include licensing agreements between corporate end users and the copyright holders of the underlying code patent holders of certain key technologies may demand payment for licensing its use in other products e g in consumer electronics or cars media companies license the content that they air or stream from producers or content creators research and discoveries found by scholars at universities may be licensed to private companies or startups especially in the fields of information technology science biotech and healthcare recently the creator economy and web 2 and web 3 era produced many creators who license their content including courses posts articles podcasts and videos related to any area they create some other common examples of licensee arrangements include the following under a franchise agreement the franchisee is granted permission to use the franchisor s assets such as supply chain trademarks or other intellectual property for a certain period of time typically the franchisee is granted exclusive rights to those assets within a certain localized area examples of franchisees include the owner operators of many retail stores or restaurants including some fast food locations in brand licensing the licensee is permitted to use a licensor s trademarks and logos on its own manufactured products such a sports apparel or toys for instance a hit superhero movie may be released that generates a large fan base the characters in the film are the property of the movie studio but they decide to solicit licensing agreements from various producers of consumer goods as such the likenesses of these characters may appear on clothing posters lunch boxes and in games they may also appear as action figures or dolls note that the producers of all these items are unaffiliated with the movie studio and must pay fees or royalties per the licensing agreements that represent the movie s brand a licensee may also be an entity that has been granted legal or regulatory permission to operate such a license is a mechanism for governments to oversee and in many cases tax certain business operators a liquor license is an example of this type by issuing the license a city or county ensures compliance with local regulations regarding alcoholic beverages and receives an additional revenue stream specifically associated with the sale of alcohol many types of businesses are required to obtain an operating license before being able to legally do business 1 these can range from food trucks to banks operating licenses can be granted at various levels of governance from local or state governments e g for food trucks all the way up to federal regulators e g in the case of banks a license to sell securities is a sort of similar permission granted on a state or nationwide basis national licenses are granted by financial industry regulatory authority finra a private regulatory authority that enforces the rules governing registered brokers and broker dealer firms in the united states examples include the series 7 and series 63 licenses an implied license can be a more ambiguous relationship as no express permission has been legally granted the classic example is the implied permission a firefighter has to enter a burning building even if the owner is not present to formally approve the entry in business this concept tends to involve a licensee interpreting communications with a licensor as implied permission to make use of an asset real estate licenseesan important use of licensee refers to permissions granted to access real estate typically a licensee of a property has been granted express permission to make use of land by the owner the property in question is not open to the general public a common example used in law schools is that of a hunter who has written permission to hunt on a landowner s property without this permission the hunter would be considered a trespasser and under very little legal protection from hazards encountered while hunting there nor could the hunter be considered an invitee a legal term to describe a guest with recourse to take legal action in response to damages suffered while in the property other requirementsin addition to paying any fees or revenues associated with being granted a license licensees are often subject to requirements that they treat the granted permission responsibly the hunter is expected to leave the property in the condition they found it the securities broker is required to recommend investments appropriate to the client the liquor store operator is prohibited from selling to underage customers a license does not grant free rein to exploit the licensed rights whether they be to a public or private asset | |
what is a licensee of a property | a licensee is one who has been given limited permission to use or occupy a property physical or intellectual property the licensee will pay or compensate the actual owner of the property for its use the terms of which will be spelled out in a licensing agreement as such the tenant of a rented apartment may be construed as a licensee of sorts | |
what is the difference between a licensor and a licensee | the licensor is the owner of some property or the rights thereof that grants permission to a licensee to use them in return for compensation | |
what is a license holder business | this term implies that a business has applied for and holds a valid license obtained from the proper authority to legally operate or do business in a certain location or locations | |
what is a licensing agency | a licensing agency is a broker that brings together license owners with potential licensees and arranges licensing agreements between these parties a licensing agent may approach the owner of a license to see if they would be interested in such an arrangement | |
what is a licensing agreement | the term licensing agreement refers to a legal written contract between two parties wherein the property owner gives permission to another party to use their brand patent or trademark the agreement which is set between the licensor the property owner and the licensee the permitted party contains details on the type of licensing agreement the terms of usage and how the licensor is to be compensated contract types vary based on what is being licensed licensing agreements also alleviate any disputes related to sales issues of quality and royalties understanding licensing agreementslicensing agreements delineate the terms under which one party may use property that is owned by another party while the properties in question can include a myriad of items including real estate holdings and personal possessions licensing agreements are most often used for intellectual property such as patents and trademarks as well as copyrights for written materials and visual art licensing agreements are widely used for the commercialization of new discoveries or technologies 1in addition to detailing all parties involved licensing agreements need to specify in granular detail how licensed parties may use properties including the following parameters 2licensing revenueslicensing revenues known as royalties are a significant source of revenue for several publicly traded companies for example a major source of income for the publicly traded company dolby laboratories is the licensing of its technology to consumer electronics manufacturers 3the terms of royalty payments are laid out in a license agreement the license agreement defines the limits and restrictions of the royalties such as its geographic limitations the duration of the agreement and the type of products with particular royalty cuts license agreements are uniquely regulated if the resource owner is the government or if the license agreement is a private contract in most license agreements royalty rates are defined as a percentage of sales or a payment per unit the many factors that can affect royalty rates include exclusivity of rights available alternatives risks involved market demand and innovation levels of the products in question to accurately estimate royalty rates the transactions between the buying and selling parties must be willingly executed in other words the agreements must not be forced furthermore all royalty transactions must be conducted at arm s length meaning that both parties act independently and have no prior relationship with one other examples of licensing agreementslicensing agreements are found in many different industries an example of a licensing agreement is a contract between the copyright holders of software and another company allowing the latter to use the computer software for their daily business operations an example of a licensing agreement in the restaurant space would be when a mcdonald s franchisee has a licensing agreement with the mcdonald s corporation that lets them use the company s branding and marketing materials toy manufacturers also routinely sign licensing agreements with movie studios giving them the legal authority to produce action figures based on popular likenesses of movie characters entering into a licensing agreementthe bargaining power of the two parties involved in a licensing agreement often depends on the nature of the product for example a movie studio that licenses the likeness of a popular superhero to an action figure manufacturer might have significant bargaining power in this negotiation because the manufacturer is likely to profit immensely from such an arrangement the movie studio thus has the leverage to take its business elsewhere if the manufacturer gets cold feet those entering into a licensing agreement should consult an attorney because there are complexities that may be hard to grasp for those without a deep understanding of intellectual property law advantages and disadvantages of licensing agreementsas mentioned above licensing agreements are legal contracts that are written between a licensor and a licensee making sure there s one in place provides certain advantages to both parties but there are also some key downfalls too we ve outlined some of the key benefits and disadvantages of these agreements below licensing agreements clearly lay out the guidelines rules and stipulations that cover the use of the licensor s brand patent or trademark both the licensor and the licensee are fully aware of what is expected and required of them this includes when payment is due and how much any additional royalties that may be due as a result of the relationship the type of agreement the length to which the licensee can use the property copyright issues and the contract s expiration date setting up an agreement saves a lot of time money and hassles for instance if someone decides to use a trademark without a licensing agreement they may be sued by the property owner which could result in legal battles court fees and lost time 4contracts give licensors can retain a great degree of control over their property and gives them access to other markets for instance a licensor can dictate how their property is marketed and it allows them to enter new markets through the licensee without actually having to set up shop there 5one of the drawbacks of having a license agreement is drawing up a contract with the wrong party in some cases licensors may want to get into a market so desperately that it doesn t do its research this means a licensor may be stuck in a lengthy contract with a company whose ideals don t align with its own the same principle applies to the licensee especially when it thinks a new product or brand may work well in a certain market without doing its research 6both parties are also at the risk of losing brand power and or their reputation for example if one company commits a marketing faux pas or is embroiled in a scandal it can put the other party at risk as well this means that both the licensor and licensee must conduct their business effectively 5entering into an agreement increases competition for the licensor although the licensee acts on behalf of the licensor it is in fact in direct competition with their partner the licensee also loses out too that s because relying on someone else s product means that the licensee may cut down its own research and development r d the expectations are laid out for each party involvedsaves time money and hasslesgives each party more control in the relationshipbreaking into markets without having to spend too much money to do sobeing stuck in a lengthy contract with the wrong companythe possibility of losing brand power or corporate reputationincreasing competitioncutting down on research developmentlicensing agreement faqsentertainment companies like netflix enter into licensing agreements all the time the online streaming service obtains the right to broadcast content either exclusively or with other companies from the title content owners for instance the company behind a major television series may enter into a licensing agreement allowing netflix to include the show among its titles for a certain number of years in exchange netflix would agree to provide royalties to the content owner from fees it collects from its subscribers licensing agreements are legal contracts that are written between two parties a licensor and licensee the contract stipulates the type of agreement the length of the relationship payments and royalties that are due and when and the extent to which licensing is allowed licensing also allows both parties to retain control over certain facets of the deal including exclusivity and how a product or service is marketed in essence the contract lays out the expectations of what is required of both parties the best way to create a licensing agreement is through a lawyer by getting professional help you lay out the proper foundation for a relationship with the other party if you don t do so you open yourself up to a lot of financial and legal hurdles 6the cost to draw up a licensing agreement can cost anywhere from a few hundred to a few thousand dollars going through a lawyer means you ll have to pay an hourly fee a simple contract may only be a few hours while a more hefty deal between parties means more details and revisions the bottom lineif you want to use someone else s property especially intellectual property you ll have to ask that party to enter into a licensing agreement with you you ll probably have to go through a lawyer to ensure that your interests and those of the property holder are safeguarded you may have to spend some money to get the agreement drawn up but by doing so your financial assets and business will be well taken care of and you re guaranteeing that the relationship with the licensor will be smooth | |
what is a licensing fee | a licensing fee is money paid to buy specific rights from another party for example this fee may be paid to a government agency by people or companies for the privilege of offering professional services or engaging in a specific type of business in other cases licensing fees are paid for the right to use intellectual property such as patents trademarks or copyrights owned by another person or entity | |
how professional licensing fees work | many professions require licenses before a person can perform the work in that field these licenses are usually granted after the individual has passed a certification exam and completed a required amount of training for example licenses are required to become a professional in many fields including once licensed an individual is known as a licensee to maintain their licenses they may need to take additional exams complete further training or pay ongoing fees their license can be revoked if the licensee violates legal standards or the code of ethics in their profession licensing fees are designed to ensure that professionals in these fields have the necessary skills and follow ethical guidelines which helps protect the public state governments often issue these licenses and individuals looking to do business in multiple states may have to obtain a license from each one for example life insurance agents usually hold a license in their home state or the one where their business is based but they can also obtain nonresident licenses to do business in other states through reciprocity agreements beyond state level licensing the federal government also requires certain businesses to pay licensing fees for example the nuclear regulatory commission charges licensing fees to commercial nuclear power plant operators the federal communications commission fcc imposes fees on radio and television broadcasters among other industries that are regulated at the federal level pros and cons of professional licensing feesprofessional licensing aims to guarantee that people or businesses engaged in a certain trade or selling specific products are qualified and knowledgable it also provides the public with the confidence in these professionals finally licensing fees also serve as a revenue source for government agencies for example a cpa is an important position as that individual can audit state and local governments and in some cases protect the public from financial crimes a notable example cpas at the federal bureau of investigation fbi who unraveled complex illegal financial transactions such as mobster al capone s conviction for tax evasion the licensing fee for cpas is vital as it ensures that these professionals adhere to rigorous standards of expertise and ethics essential for handling sensitive financial information and protecting public interests in various high stakes scenarios however the costs associated with licensing fees along with the time and investment required for the necessary training can create barriers to entry into licensed occupations for example hairdressers must pay a licensing fee and obtain a cosmetology license to legally operate which in turn can increase the cost of their services these requirements for professional licensing are meant to ensure quality and provide the public with confidence in those professions some may argue that weakening licensing requirements or reducing fees could put the public at risk but licensing fees may also inadvertently limit the number of professionals entering certain fields and lead to a shortage in certain services historical events have influenced professional licensing the collapse of the st francis dam in california in 1928 which resulted in over 500 fatalities was pivotal in initiating the licensing of professional engineers in these states the dam collapse was attributed to poor engineering and human errors and led to licensing requirements | |
how other licensing fees work | a licensing fee can also refer to a sum paid to use intellectual property of various kinds such as a copyrighted work like a photograph or a logo that is owned by someone else for example a t shirt company that wants to sell shirts imprinted with a certain major league baseball team s logo would need to pay a licensing fee to get major league baseball s permission and possibly the permission of the team itself a television or movie company wanting to use a particular song in its soundtrack might have to pay for multiple licenses according to the american society of composers authors and publishers ascap which licenses more than 18 million songs and scores the producer would need to obtain a synchronization license for the right to synchronize a song or a piece of music with your visual image it must be obtained from the copyright owner of the music which is usually the publisher in addition the company would need to obtain a master use license for the right to reproduce a specific recording of a song from the relevant music label in one notably expensive example the producers of mad men reportedly paid about 250 000 to license the beatles song tomorrow never knows so that the character don draper could listen to it in one scene licensing fee vs royaltyroyalties are ongoing usage based payments for the right to use an asset or a property they are generally calculated as a percentage of gross revenue or net profit licensing fees by contrast are usually a fixed amount some businesses pay both licensing fees and royalties for example a franchisee might pay the parent franchiser an initial license fee for the right to use the franchise s name and processes plus regular royalties based on sales those royalties often average 5 to 9 annually depending on the franchise | |
what is intellectual property | as the world international property organization a united nations agency defines it intellectual property refers to creations of the mind such as inventions literary and artistic works designs and symbols names and images used in commerce the legal ownership of intellectual property is protected by trademarks copyrights and patents | |
are professional licensing fees tax deductible | professional licensing fees are usually tax deductible however some licensing fees may be amortized over 180 months amortized fees include the cost of acquiring or renewing a liquir license tv or radio broadcasting license or taxicab medallion | |
is the education required for licensing tax deductible | for education costs to be tax deductible you must already be working in that field and show either that the education maintains or improves required skills for your profession or is required by regulations education expenses that are necessary to meet the minimum requirements of your present procession aren t tax deductible the bottom linepeople or businesses often pay these fees to government agencies to practice a profession or conduct a particular business licensing fees ensure that professionals meet necessary standards thereby protecting public safety for intellectual property licensing fees are paid to use copyrighted trademarked or patented material licensing fees can help maintain safety and professional standards but they can also create barriers to entry in certain professions this can result in fewer available services and increased costs for customers when it comes to intellectual property licensing fees enable the legal use of creative works and protect the work of artists though they also increase costs for businesses seeking to use these works | |
what is a lien | a lien is a claim or legal right against assets that are typically used as collateral to satisfy a debt a creditor or a legal judgment could establish a lien a lien serves to guarantee an underlying obligation such as the repayment of a loan if the underlying obligation is not satisfied the creditor may be able to seize the asset that is the subject of the lien there are many types of lien that are used to secure assets dennis madamba investopedia | |
how liens work | a lien provides a creditor with the legal right to seize and sell the collateral property or asset of a borrower who fails to meet the obligations of a loan or contract the owner cannot sell the property that is the subject of a lien without the consent of the lien holder a floating lien refers to a lien on inventory or other unfixed property liens can be voluntary or consensual such as a lien on a property for a loan however involuntary or statutory liens exist whereby a creditor seeks legal action for nonpayment as a result a lien is placed on assets including property and bank accounts some liens are filed with the government to let the public know that the lienholder has an interest on the asset or property a lien s public record tells anyone interested in purchasing the asset or collateral that the lien must be released before the asset can be sold types of lienthere are many types of lien and lien holder liens can be put in place by financial institutions governments and small businesses below are some of the most common liens a lien is often granted when an individual takes out a loan from a bank to purchase an asset for example if an individual purchases a vehicle the seller would be paid using the borrowed funds from the bank in turn the bank would be granted a lien on the vehicle if the borrower does not repay the loan the bank may execute the lien seize the vehicle and sell it to repay the loan if the borrower does repay the loan in full the lien holder the bank then releases the lien and the individual owns the car free and clear of any liens a judgment lien is a lien placed on assets by the courts which is usually a result of a lawsuit a judgment lien could help a defendant get paid back in a nonpayment case by liquidating the accused s assets a mechanic s lien can be attached to real property if the owner fails to pay a contractor for services rendered if the debtor never pays the contractor could go to court and get a judgment against the nonpaying party whereby property or assets can be auctioned off to pay the lien holder many service providers have the option to place a lien to secure payment including construction companies and dry cleaners a real estate lien is a legal right to seize and sell real estate property if a contract is not fulfilled some real estate liens are automatically put in place such as in the case of a mortgage lien when a party borrows money from a bank to purchase their home the bank places a lien on the house until the mortgage is paid off however some real estate liens are due to nonpayment to a creditor or financial institution and as a result are involuntary and nonconsensual liens there are also several statutory liens meaning liens created by law instead of those created by a contract these liens are very common in the field of taxation where laws often allow tax authorities to put liens on the property of delinquent taxpayers for example municipalities can use liens to recover unpaid property taxes in the united states if a taxpayer becomes delinquent and does not demonstrate any indication of paying owed taxes the internal revenue service irs may place a legal claim against a taxpayer s property including the taxpayer s home vehicle and bank accounts a notice of federal tax lien notifies creditors of the government s claim and can lead to a sheriff s sale 1 a sheriff s sale is a public auction whereby assets are repossessed and sold and the generated funds are used to repay a debt to a creditor bank or the irs a tax lien also affects the taxpayer s ability to sell existing assets and obtain credit the only way to release a federal tax lien is to fully pay the tax owed or reach a settlement with the irs the irs has the authority to seize the assets of a taxpayer who ignores a tax lien typically the irs uses liens for delinquent taxes as a last resort following all other options being exhausted such as collection installment repayment plans and settlement 1 | |
what does a lien mean | a lien is simply the legal right of a lender to sell your property a house or a car for example if don t meet your contractual obligations on the loan you took out to purchase it | |
how do i get rid of a lien | you can get rid of a lien on your property car or other asset by paying off your loan in full the bottom linea lien is a claim or legal right against assets that are normally used as collateral to satisfy a debt that lien could be established by a creditor legal judgment or tax authority and it serves to guarantee an underlying obligation such as the repayment of a loan if that doesn t happen the creditor could then seize the asset that is the subject of the lien | |
what is a lien | a lien is a claim or legal right against assets that are typically used as collateral to satisfy a debt a creditor or a legal judgment could establish a lien a lien serves to guarantee an underlying obligation such as the repayment of a loan if the underlying obligation is not satisfied the creditor may be able to seize the asset that is the subject of the lien there are many types of lien that are used to secure assets dennis madamba investopedia | |
how liens work | a lien provides a creditor with the legal right to seize and sell the collateral property or asset of a borrower who fails to meet the obligations of a loan or contract the owner cannot sell the property that is the subject of a lien without the consent of the lien holder a floating lien refers to a lien on inventory or other unfixed property liens can be voluntary or consensual such as a lien on a property for a loan however involuntary or statutory liens exist whereby a creditor seeks legal action for nonpayment as a result a lien is placed on assets including property and bank accounts some liens are filed with the government to let the public know that the lienholder has an interest on the asset or property a lien s public record tells anyone interested in purchasing the asset or collateral that the lien must be released before the asset can be sold types of lienthere are many types of lien and lien holder liens can be put in place by financial institutions governments and small businesses below are some of the most common liens a lien is often granted when an individual takes out a loan from a bank to purchase an asset for example if an individual purchases a vehicle the seller would be paid using the borrowed funds from the bank in turn the bank would be granted a lien on the vehicle if the borrower does not repay the loan the bank may execute the lien seize the vehicle and sell it to repay the loan if the borrower does repay the loan in full the lien holder the bank then releases the lien and the individual owns the car free and clear of any liens a judgment lien is a lien placed on assets by the courts which is usually a result of a lawsuit a judgment lien could help a defendant get paid back in a nonpayment case by liquidating the accused s assets a mechanic s lien can be attached to real property if the owner fails to pay a contractor for services rendered if the debtor never pays the contractor could go to court and get a judgment against the nonpaying party whereby property or assets can be auctioned off to pay the lien holder many service providers have the option to place a lien to secure payment including construction companies and dry cleaners a real estate lien is a legal right to seize and sell real estate property if a contract is not fulfilled some real estate liens are automatically put in place such as in the case of a mortgage lien when a party borrows money from a bank to purchase their home the bank places a lien on the house until the mortgage is paid off however some real estate liens are due to nonpayment to a creditor or financial institution and as a result are involuntary and nonconsensual liens there are also several statutory liens meaning liens created by law instead of those created by a contract these liens are very common in the field of taxation where laws often allow tax authorities to put liens on the property of delinquent taxpayers for example municipalities can use liens to recover unpaid property taxes in the united states if a taxpayer becomes delinquent and does not demonstrate any indication of paying owed taxes the internal revenue service irs may place a legal claim against a taxpayer s property including the taxpayer s home vehicle and bank accounts a notice of federal tax lien notifies creditors of the government s claim and can lead to a sheriff s sale 1 a sheriff s sale is a public auction whereby assets are repossessed and sold and the generated funds are used to repay a debt to a creditor bank or the irs a tax lien also affects the taxpayer s ability to sell existing assets and obtain credit the only way to release a federal tax lien is to fully pay the tax owed or reach a settlement with the irs the irs has the authority to seize the assets of a taxpayer who ignores a tax lien typically the irs uses liens for delinquent taxes as a last resort following all other options being exhausted such as collection installment repayment plans and settlement 1 | |
what does a lien mean | a lien is simply the legal right of a lender to sell your property a house or a car for example if don t meet your contractual obligations on the loan you took out to purchase it | |
how do i get rid of a lien | you can get rid of a lien on your property car or other asset by paying off your loan in full the bottom linea lien is a claim or legal right against assets that are normally used as collateral to satisfy a debt that lien could be established by a creditor legal judgment or tax authority and it serves to guarantee an underlying obligation such as the repayment of a loan if that doesn t happen the creditor could then seize the asset that is the subject of the lien | |
what is a lien waiver | a lien waiver is a written agreement between a payer and a counterparty where said counterparty gives up their right to place a lien on the payer s property or goods understanding lien waiversa lien waiver is quite common in the construction business essentially it is a document from a contractor subcontractor supplier or another party who holds a mechanic s lien that states they have been paid in full and waive future lien rights to the disputed property in the united states many states only recognize conditional waivers on progress payments and unconditional waivers upon final payments just as a mechanic s lien can be a great aid to those seeking payment for services rendered a lien waiver can be beneficial for owners that have made full or partial payments generally there are four types of lien waivers | |
how to apply a lien waiver in the construction and development process | lien waivers may see frequent use in the construction industry through many phases of a project a lien waiver could be exchanged as each service is completed and payment is received by each party some parties will not release payment until a lien waiver is signed and delivered to them it might not always be prudent to sign a lien waiver in advance of receiving payment there is the possibility that a check might bounce or that the actual delivery of payment is otherwise delayed the lien waiver document serves as a form of receipt and eliminates the possibility of a mechanic s lien from being filed the document is meant to guarantee that all parties are being properly provided for in their business relationship they give paying parties the confidence of knowing that they won t be faced with making multiple payments for a single service they can also speed up the payment process allowing parties being paid to receive their payments sooner often paying parties don t want to cut a check until a lien waiver has been signed the sooner a lien waiver enters the business relationship the faster payment can be made once the work is complete the party receiving the payment may write its own lien waiver in order to be completely confident of signing away only lien rights if subcontractors are involved in a project the complexity of receiving lien waivers can increase the primary contractor might take action by issuing a lien waiver for the latest payment and lien waivers from subcontractors for earlier work on the project they have already received payment for lien waivers should outline the specific materials work and project they are issued for if they do not it is possible that the recipient of the lien waiver might claim the payment was for any project they wish rather than the one in question and that the new payment is still required | |
what is a life annuity | a life annuity is a financial product sold by an insurance company that features a predetermined periodic payout amount until the death of the annuity owner who is called the annuitant an annuitant typically pays into the annuity periodically when they are still working annuitants may also buy the annuity in one large lump sum purchase usually at retirement life annuities are commonly used to provide guaranteed and or supplemental retirement income that cannot be outlived | |
how a life annuity works | life annuities come in two different phases the first is the accumulation phase this is the period when the buyer funds their annuity with premiums or with a lump sum payment the second stage is the income or the annuitization phase during this period the issuer or insurance company makes regular payments to the annuitant once funded and enacted the annuity makes periodic payouts to the annuitant thus providing a reliable source of income the issuer normally stops making periodic payments if the annuitant dies or if another triggering event occurs to close the annuity but these payments may continue to the annuitant s estate or beneficiary if the annuitant had purchased a rider or other option on the annuity since most life annuity payouts stop at the death of the annuitant you may need to purchase a rider if you want your beneficiary to continue receiving payments the majority of annuities generally pay a benefit every month but some make quarterly annual or semi annual payments payment intervals depend on the specific needs of the annuitant or their tax circumstances many retirees fund a life annuity to match their recurring housing costs mortgage or rent as well as any other costs including health care insurance premiums and medical expenses while a life annuity pays a guaranteed income it is not indexed to inflation which is the pace of price increases in an economy as a result purchasing power may erode over time a life annuity once enacted is not revocable special considerationsit s important to consult a reputable professional before purchasing an annuity that s because annuities tend to be fairly complex with major implications for the annuitant s standard of living due to the tax preferred nature of annuities very wealthy investors and above average income earners may use these life insurance products to transfer large sums of money or to mitigate the effects of taxes on their annual income while life annuities are often used to provide or supplement retirement income they are also used as a payment method in structured settlements and for lottery winners for instance if someone wins a lawsuit they may be provided with a series of fixed regular payments to the beneficiary lottery winners may opt to take a lottery annuity rather than a fixed lump sum when they win large jackpots these payouts provide regular payments annually over a certain number of years for example a mega millions jackpot winner can choose to take 30 payments with one paid out immediately the remaining payments are distributed annually for the next 29 years 1 | |
what is the difference between a fixed annuity and a variable annuity | a fixed annuity pays out a fixed percentage or interest rate on the owner s contributions to the annuity a variable annuity pays out based on the performance of a basket of investments variable annuities offer the potential for higher returns or payouts when markets are performing well however they also contain more risk than fixed annuities since the account could decline in value when the markets perform poorly | |
what is a joint annuity | a joint annuity makes payouts until both spouses die sometimes at a reduced amount after the death of the first spouse | |
what is a qualified longevity annuity contract qlac | a qualified longevity annuity contract qlac is a type of deferred annuity that is purchased using funds from a qualified retirement plan or an individual retirement account ira a qlac provides monthly payments until death and is exempt from the required minimum distribution rmd rules from the internal revenue service irs in 2024 an individual can spend up to 200 000 to buy a qlac 2the bottom linelife annuities are insurance or investment products that provide the annuitant with fixed payments at regular intervals life annuities also known as lifetime annuities are generally sold by insurance companies they essentially act as longevity insurance as the risk of outliving one s savings is passed on to the annuity issuer or provider | |
what is a life cycle | the term life cycle refers to the course of events that leads from the beginning to the end of a product business or industry this means that a life cycle brings new products companies and industries into existence sees them grow and eventually leads to their critical mass and decline there are several key steps that life cycles take including development growth and decline understanding how the life cycle works can give investors and others a better understanding of how to invest their money | |
how the life cycle works | the idea of a cycle in a business context is borrowed from biology in biology a life cycle represents a series of changes that an organism undergoes from birth to death extended to a business setting an entity s formation and eventual decline follow a similar path to biological applications the life cycle represents the entire existence or life of something in the marketplace this includes products and services businesses and corporations and even industries in most cases even the economy goes through a life cycle we look at each of these in more detail a little further down throughout each of these types of life cycles there is a development maturity and decline phase as such the life cycle represents the length of time it takes for a product to be introduced in the market until it is eventually removed the life cycle is also commonly referred to as the business life cycle special considerationsthere is a misconception that growth tends to stop when a product or business hits its peak in the market in certain cases profits may dip or a business owner may consider selling their company during this period this may be the case for startups and newer businesses but this isn t a one size fits all approach in fact reaching the maturity stage can often mean that growth continues as margin improvements and innovations translate to an increase in income although growth can still happen when a product hits maturity a more mature firm with older products may be more likely to issue dividends than firms in the other phases this is why investors need to understand the life cycle works doing so can help them make better and more informed decisions about how to invest their money for instance it s important to note that firms that are predominately in the development phase are generally characterized by lower sales and are more speculative in nature than firms in the growth or maturity phase types of life cyclesas mentioned above there are different types of life cycles that take place the most common ones that are discussed are the product business and industry life cycles but there are others that take place in the realms of finance and investment that people should understand one of the most common types of life cycles is the product life cycle this deals with how long products last in the market from development to decline by different companies whether they are new startups or established corporations the following are the five steps involved in the life cycle of a product or service businesses also have their own life cycle this means they go through various stages that lead from their creation to their decline just like products the following are the most common stages in the life cycle of a company understanding how these stages work can make a big difference to investors and more importantly to business owners many businesses fail to get off the ground during the startup phase because owners don t take enough time and rush through the process those who are well prepared can ride the waves and better navigate themselves through any challenges that may arise to success industries and economies often follow the same stages during their life cycles these include the analysis of a business or company can show the stage a company is in and the same is true for an economy by analyzing the four stages of a company s industry life cycle financial decisions like estimating forward earning ratios and projecting future financial earnings and performance can be made with greater knowledge if we think of the economy and commerce as a living organization adapting and transforming to its surroundings we can find many biological analogies for business challenges such as survival of the fittest examples of life cyclescoca cola released this diet soda in 1963 decades before diet coke s heyday tab was the company s first foray into the diet drink market the drink became popular in the 1970s and early 1980s but its popularity fizzled out when diet coke created a decline in the tab s market share 1coca cola discontinued tab in 2020 along with other products that were underperforming this discontinuation marked the decline life cycle phase for the once popular diet beverage 2electric cars are in their growth cycle as of april 2021 the global electric vehicles market was worth approximately 140 billion in 2019 the most recent figures made available by facts factors which published a 175 page research report on the electric vehicle market the electric car is a prime example of a product in the growth phase it is estimated that by 2026 the electric car market will hit 700 billion and it s not just tesla running the electric car charge anymore top market players also include kia hyundai bmw volkswagon ford and toyota 3 | |
what are the stages of a product life cycle | the product life cycle is the time it takes to go from development to decline put simply the life cycle for a product takes place from conception to the time it is removed from the market in what stage of the business life cycle does seed financing occur seed financing is a form of financing that is used to help businesses their products and services get off the ground as such seed financing is typically required and used during the first or the development stage | |
what impact does the life cycle have on a small business | businesses of any kind or size are affected by a life cycle this means that if a small business can experience growth and maturity if it makes a product or provides a service to its customers it can also go into decline which means the business could fail if challenges aren t properly addressed in which part of the business life cycle does facebook fall meta formerly facebook may be in the maturity phase this means that it may be heading into decline or stability according to various sources including gws technologies 4the bottom linein business a life cycle is a way to describe the birth growth and maturation and eventual decline of a product or service by understanding the sequence of events in a life cycle companies can make better financial decisions these steps include product development market introduction growth maturity and decline stability and in many ways mirror the biological life cycle of a living organism managing the lifecycle of a product is helpful in many ways for a company from getting a better understanding of how to improve on a new product increasing marketing and sales and reducing errors or waste like the packaging | |
what is a life cycle fund | life cycle funds are asset allocation funds in which the share of each asset class is automatically adjusted to lower risk as the desired retirement date approaches as a practical matter this usually means that the percentage of bonds and other fixed income investments increases life cycle funds are also known as age based funds or target date retirement funds a young investor saving for retirement would typically choose a life cycle fund with a target date that is 30 to 40 years away however an investor nearing retirement age might be planning a working retirement with some income from a small business such an investor could select a life cycle fund with a target date that is 15 years in the future accepting higher volatility can help to stretch retirement funds over the 20 or more years of old age most individuals can expect life cycle funds are based on the idea that young investors can handle more risk but this is not always true | |
how a life cycle fund works | life cycle funds are designed to be used by investors with specific goals that require capital at set times these funds are generally used for retirement investing however investors can use them whenever they need capital at a specific time in the future each life cycle fund defines its time horizon by naming the fund with a target date an example will help to explain how a life cycle fund works suppose that you invest in a life cycle fund with a target retirement date of 2050 in 2020 at first the fund will be aggressive in 2020 the fund might hold 80 stocks and 20 bonds each year there will be more bonds and fewer stocks in the fund by 2035 you should be halfway to the retirement date the fund would be 60 stocks and 40 bonds in 2035 finally the fund would reach 40 stocks and 60 bonds by the target retirement date of 2050 benefits of life cycle fundsfor investors with a targeted need for capital at a specific date life cycle funds offer the advantage of convenience life cycle fund investors can easily put their investing activities on autopilot with just one fund the fixed asset allocations of life cycle funds promise to give investors the right balanced portfolio for them each year for investors who seek to take a very passive approach to retirement a life cycle fund may be appropriate most life cycle funds also have the advantage of a preset glide path a preset path offers investors greater transparency which gives them more confidence in the fund a life cycle fund s glide path provides for steadily decreasing risk over time by shifting asset allocations toward low risk investments investors can also expect a life cycle fund to be managed through the target retirement date criticisms of life cycle fundssome critics of life cycle funds say that their age based approach is flawed in particular the age of the bull market may be more important than the age of the investor legendary investor benjamin graham suggested adjusting investments in stocks and bonds based on market valuations rather than your age building on graham s work nobel prize winning economist robert shiller advocated using the p e 10 ratio as a measure of stock market valuation life cycle funds are based on the idea that young investors can handle more risk but this is not always true younger workers usually have less money saved and they almost always have less experience as a result younger workers are exceptionally vulnerable to unemployment during recessions a young investor who takes on high levels of risk might be forced to sell stocks at the worst possible time investors might also prefer a more active approach those investors should seek a financial advisor or use other types of funds to meet their investment goals real world example of a life cycle fundthe vanguard target retirement 2065 trusts are one example of life cycle funds in july 2017 vanguard launched its life cycle offering for 2065 the vanguard target retirement 2065 trusts 1 the fund offers an example of how life cycle funds transition their allocations for risk management the vanguard target retirement 2065 asset allocation remains fixed for the first 20 years with approximately 90 in equities and 10 in bonds for the next 25 years leading to the target date the allocation gradually moves more toward bonds at the target date the asset allocation is approximately 50 in equities 40 in bonds and 10 in short term tips the allocation to bonds and short term tips gradually continues to increase in the seven years following the target date after that the allocation is fixed at approximately 30 stocks 50 bonds and 20 short term tips | |
what is the life cycle hypothesis lch | the life cycle hypothesis lch is an economic theory that describes the spending and saving habits of people over the course of a lifetime the theory states that individuals seek to smooth consumption throughout their lifetime by borrowing when their income is low and saving when their income is high the concept was developed by economists franco modigliani and his student richard brumberg in the early 1950s understanding the life cycle hypothesisthe lch assumes that individuals plan their spending over their lifetimes taking into account their future income accordingly they take on debt when they are young assuming future income will enable them to pay it off they then save during middle age in order to maintain their level of consumption when they retire 1a graph of an individual s spending over time thus shows a hump shaped pattern in which wealth accumulation is low during youth and old age and high during middle age life cycle hypothesis vs keynesian theorythe lch replaced an earlier hypothesis developed by economist john maynard keynes in 1937 keynes believed that savings were just another good and that the percentage that individuals allocated to their savings would grow as their incomes rose this presented a potential problem as it implied that as a nation s incomes grew a savings glut would result and aggregate demand and economic output would stagnate another problem with keynes s theory is that he did not address people s consumption patterns over time for example an individual in middle age who is the head of a family will consume more than a retiree although subsequent research has generally supported the lch it also has its problems the lch has largely supplanted keynesian economic thinking about spending and savings patterns special considerations for the life cycle hypothesisthe lch makes several assumptions for example the theory assumes that people deplete their wealth during old age often however the wealth is passed on to children or older people may be unwilling to spend their wealth the theory also assumes that people plan ahead when it comes to building wealth but many procrastinate or lack the discipline to save another assumption is that people earn the most when they are of working age however some people choose to work less when they are relatively young and continue working part time when they reach retirement age as a result one implication is that younger people are more able to take on investment risks than older individuals which remains a widely accepted tenet of personal finance other notable assumptions are that those with high incomes are more able to save and have greater financial savvy than those on low incomes people with low incomes may have credit card debt and less disposable income lastly safety nets or means tested benefits for aging adults may discourage people from saving as they anticipate receiving a higher social security payment when they retire who wrote the life cycle hypothesis lch theory economists franco modigliani and his student richard brumberg developed the lch in the early 1950s | |
what is the concept of the life cycle hypothesis | this economic theory says that people try to maintain approximately the same level of consumption throughout their lives that means generally speaking when they are young they may take on debt when they are in their prime earning years they save more and and when they are old they live off the wealth they accumulated earlier in life 2 | |
what is an example of the life cycle hypothesis | a good example of the lch theory in practice is saving for retirement during your working years you save money for when you are no longer working knowing that you may not have income when you re older the bottom linethe life cycle hypothesis developed in the 1950s posits that people tend to maintain a consistent spending level over their lifetimes over time there have been criticisms leveled against the lch one is people don t always maintain a consistent pattern of consumption someone who is middle aged with a family of four and a mortgage is likely to consume more than at a time of life when they are retired and have no dependents and own their home however the lhc is still considered an important part of modern economic theory 2 | |
what is a life estate | a life estate is a property usually a residence that an individual owns and may use for the duration of their lifetime this person is called the life tenant and shares ownership of the property with a second person the second person is referred to as the remainderman and automatically receives the title to the property upon the life tenant s death homeowners most often create life estates in the u s to ensure that the next generation will eventually get the family home and avoid probate the legal process of proving a will distributing assets paying creditors and settling an estate these are known as interest in possession trusts in the u k and they dictate the distribution of trust income understanding a life estatea life estate is a form of joint homeownership shared between a life tenant and a remainderman the remainderman has an ownership interest but can t take possession until the life tenant s death the life tenant can live in the home but can t sell it or mortgage it without the agreement of the remainderman 1a life estate is established with a deed that states that the occupant of the property is allowed to use it for the duration of their life the deed will also name the individual who will receive the property after the life tenant s death a homebuyer can arrange a life tenancy with an elderly homeowner in france and pay that person a regular income in return for being named as the designated remainderman this is called a viager the life estate deed within a life estate is a document that grants the owner the ability to pass on ownership of a property without including it in a will as part of their estate assets the property doesn t have to go through probate the court process that s used to distribute bequests and settle an estate as a result the probate process can be costly and complicated particularly when an estate is very substantial or unusually complex the life tenant s interest in the property ends at death and ownership is transferred to the remainderman the life tenant is the property owner for life and is responsible for costs such as property taxes insurance and maintenance the life tenant also retains any tax benefits of homeownership life insurance as an income streama life estate is usually created to streamline the transfer of homeownership to the next generation but it can also be used to establish an income stream life estates can be created to provide a life long income for a person rather than a lump sum inheritance the estate consists of money invested in income producing instruments in this case such as bonds oil and gas leases and real estate investment trusts reits the life tenant receives income for life under this arrangement but they can t access the principal amount the life tenant can t sell any property that s involved in a life estate or borrow money against it without the agreement of the remainderman the remainderman could demand a portion of the proceeds based on a predetermined scale that reflects the life tenant s age and current interest rates if they both agree to the sale the remainderman can typically expect to receive a greater share as the life tenant ages | |
how to create a life estate | there are only a few steps involved in creating a life estate alternatives to a life estatea life estate is an excellent tool for securing your assets to pass on to your beneficiaries and bypass lengthy probate but it isn t the only option available you can also create a life estate and medicaidmedicaid is a state program that ensures that people who must move into a long term care facility can receive the care you can t qualify for medicaid if you own more than your state allows unless you meet certain specific conditions medicaid also commonly seeks reimbursement after you die from any estate you may leave it commonly targets a recipient s home because this is generally their most valuable asset medicaid might place a lien on the house or try to force its sale to recoup the cost of your long term care the home is no longer an asset of the individual s estate under a life estate this shields it from lawsuits including medicaid estate recovery 5types of life estatesthere are two types of life estates traditional and enhanced the enhanced version is typically referred to as a lady bird deed commonly thought to have originated when president johnson transferred property to his wife lady bird johnson when he died the practice is much older than that however 6the enhanced version differs from the traditional only in that the life tenant can sell the property or take out a mortgage against it without the remainderman s consent and it can be revoked advantages and disadvantages of life estatesthe most notable advantage of a life estate is that it simplifies the transfer of a home to the next generation the probate process may delay the transfer if the home is included in the homeowner s will the transfer is automatic with a life estate when a death certificate is filed there are potential tax benefits in addition to legal benefits a potential legal disadvantage exists as well however the life tenant may become involved in any legal problems that a remainderman incurs a lien could be filed against the parent s home if a parent and a child have created a life estate and the child is pursued for nonpayment of taxes creating a life estate is a serious and binding decision for a homeowner in any case they re giving up the option of selling or mortgaging the home unless the remainderman agrees they re making an irrevocable choice of an heir to the house simplifies the transfer of a home to the next generationprotects the home from debtors of the deceasedallows older homeowners to retain the benefits of home ownershipmakes the owner vulnerable to debt actions brought against the remaindermancan t be undone easily if the owner s plans or circumstances changerestricts owner s ability to mortgage or sell propertylife estate vs irrevocable trustlike a life estate an irrevocable trust is often a tool for estate planning the irrevocable trust removes assets from the grantor s estate specifically the grantor relinquishes all rights to some assets and income transferring them to a trust the assets may be cash investments or life insurance policies the trust s beneficiary may be a spouse the grantor s children or a charitable organization a life estate is also irrevocable the life tenant can t alter the agreement without the consent of the remainderman after a life estate deed is filed an irrevocable trust does have its uses however it can reduce a person s wealth on paper transferring that wealth to family members it also removes some of the person s assets from an estate eliminating them from the probate process a trust can be a valuable strategy for a professional who s vulnerable to lawsuits such as a physician it protects some of their assets because they relinquished ownership of them when they were placed into the trust 7example of a life estatea life estate agreement is usually undertaken as an aspect of estate planning an older couple might consider a life estate arrangement as an alternative to naming a beneficiary in their wills a life estate agreement gives them the right to stay in their home for the rest of their lives then an adult child or children will automatically take title to the property when they re both deceased a widowed homeowner who can no longer live alone might create a life estate agreement with an adult child as the remainderman the parent and child now co own the home but the parent retains lifetime rights to use it both ensure that home ownership will pass to the child without delay or interruption | |
what is a life estate | a life estate is a legal document that splits ownership of property so that the first party retains rights to use the property and the second party retains rights to inherit it | |
what are the disadvantages of a life estate | you can t refinance sell or alter title to the property without the remainderman s permission if you have a life estate on the property who owns the property in a life estate the property is owned by all designated parties in a life estate deed but the life tenant retains the right to occupy the estate until their death the bottom linecreating a life estate is a reasonable way for homeowners to ensure that their homes will be passed on to the person they want with minimal legal fuss or delay it should only be established with the full understanding that it can t be easily undone however the homeowner is giving up the right to sell the property or to take out a mortgage or other loan against it without the cooperation of the remainderman | |
what is life expectancy | life expectancy is a statistical estimate of the average number of years a person is expected to live based on actuarial data there are many uses for life expectancy in the financial industry including for life insurance pension planning and u s social security benefits in most countries the calculations for actuarial ages are derived from a national statistical agency based on large amounts of data understanding life expectancylife expectancy is the single most influential factor that insurance companies use to determine life insurance premiums 1 using actuarial tables provided by sources such as the internal revenue service these companies use actuarial age as they try to minimize their liability risk there are several factors that affect your life expectancy also known as your actuarial age the two single most important considerations are when you were born and your gender additional factors that can influence your life expectancy include you can view the federal government s data on u s life expectancy on the national center for health statistics website and in the social security administration s actuarial period life table it s important to note that life expectancy changes over time that s because as you age actuaries use complex formulas that factor out people who are younger than you but have already died as you continue to age past mid life you outlive an increasing number of people who are younger than you so your life expectancy actually increases in other words the older you get past a certain age the older you are likely to get overall human life expectancy has been rapidly increasing during the past two hundred years particularly in developing countries however that rate did decline in the early 2020s during the covid 19 pandemic in 2021 the average life expectancy in the united states was 76 1 years 2life expectancy and life insurancelife expectancy is the primary risk factor in determining whether someone buying life insurance will pass away so their beneficiaries will make a death benefit claim insurance companies consider age lifestyle choices personal and family medical history and several other factors when determining premium rates for individual life insurance policies 1there is a direct correlation between your life expectancy and how much you ll be charged for a life insurance policy the younger you are when you purchase a life insurance policy the longer you are likely to live that means there is a lower risk to the life insurance company because you are less likely to die in the near term which would require a payout of the full benefit of your policy before you have paid much into the policy 3conversely the longer you wait to purchase life insurance the lower your life expectancy which translates into a higher risk for the life insurance company companies compensate for that risk by charging a higher premium the principle of life expectancy suggests that you should purchase a life insurance policy for yourself and your spouse sooner rather than later you will save on premium costs if you buy a permanent policy that builds cash value buying while younger also gives your policy more time to build savings retirement and annuity planninglife expectancy is critical for retirement planning many aging workers arrange their retirement plans asset allocations based on a prediction of how long they expect to live personal rather than statistical life expectancy is a primary factor in creating a retirement plan | |
when couples are planning for retirement they often use a joint life expectancy this approach takes the life expectancy of their partner who may become the beneficiary of a retirement fund or pension plan into account as well as their own the irs provides tables to help you calculate joint life expectancy 4 | most retirement plans including traditional roth sep and simple ira plans also use life expectancy to determine the implementation of required minimum distributions rmds for the plan most retirement plans expect participants to begin taking at least the rmd by the time they reach the age of 72 or age 73 starting in 2023 5 retirement plans base distributions on irs life expectancy tables some qualified plans may allow rmd distributions to begin at a later date 6due to an increase in life expectancy congress adjusted the required minimum distribution age from 70 to 72 in 2019 and again to age 73 starting in 2023 57your life expectancy is also a significant factor when arranging annuity payments with an insurance company in an annuity contract the insurance company agrees to pay a certain amount of money for a fixed period or until the policyholder s death it s important to take life expectancy into account when negotiating annuity contracts if you agree to receive payouts for a specific period you are essentially estimating how long you expect to live if you outlive this period you stop receiving money from the annuity you may also elect to use a single life annuity payment plan in which annuity payments will continue as long as you re alive if you re married you could use a joint life annuity that lasts as long as you or your spouse is alive | |
what is the average life expectancy in the us | the average lifespan at birth for a woman in the united states is 79 1 years as of 2021 according to the centers for disease control the average lifespan for men at birth was 73 2 years this represents a decline from prior years largely due to drug overdoses accidents and the covid 19 pandemic the overall life expectancy is 76 1 years 2 | |
how does life expectancy factor in to insurance | life insurance companies use mortality tables to estimate the life expectancy of their policyholders based on the statistical averages for people with similar ages and health this allows them to predict how much money they will have to pay out in claims | |
how does life expectancy affect premiums | your age is the primary factor companies consider when deciding how much to charge for life insurance followed by your health condition life expectancy is greater at younger ages so the younger you are when you apply for coverage the lower your rates 9the bottom linelife expectancy indicates how much longer the average person of your age will live your estimated life expectancy plays an important role in a number of financial decisions from how much money you should save for retirement to when you should buy insurance and how much you will pay for your coverage keep life expectancy in mind as you make these major financial decisions | |
what does life income fund mean | a life income fund lif is a type of registered retirement income fund rrif in canada that can be used to hold locked in retirement accounts liras and other assets for retirement income a lif is meant to live up to its name and funds aren t to be withdrawn in a lump sum owners must use it to support retirement income regular updates to canada s income tax act set the minimum and maximum withdrawal amounts for rrifs which include lifs though these limits and other aspects of a lif depend on the province in which the pension plan was set up 1 the annual maximums and minimums may account for your balances in other funds and annuities withdrawals from a lif are taxed as income in the year they are received in most provinces you must convert your lira to a lif by the end of the year when you turn 71 understanding life income fund lif lifs are offered by canadian financial institutions they are plans for managing payments from locked in pension funds and other assets in many cases pension assets aren t accessible when an employee leaves a firm these assets usually called locked in can be managed through other plans however you might need to move the funds into a lif once you re ready to begin withdrawals most provinces in canada require that lif assets be invested in a life annuity in many provinces lif withdrawals can begin at 50 if the income is used for retirement income 2once you begin taking lif payouts you ll have to ensure you mean the minimum and maximum for each year your financial institution for the lif will have this information which is updated regularly through canada s income tax act and has sections that regulate all rrifs the financial institution from which the lif is issued must give you annual statements for the lif based on the annual statement you must specify at the beginning of each fiscal year the amount of income you would like to withdraw this must be within a defined range to ensure the account holds enough funds to provide lifetime income for the lif owner qualified investments include cash mutual funds exchange traded funds securities listed on a regulated exchange corporate bonds and government bonds 2life income fund lif ruleshere are some general rules about lifs 3advantages and disadvantages of a life income fund lif setting up a lif has several advantages 14there are some disadvantages to setting up a lif they include the following contributions grow tax deferred within a lif account | |
what is life insurance | understanding how life insurance works and how to shop for a policy can help you find the best coverage to meet your family s needs life insurance is a contract between an insurance company and a policy owner in which the insurer guarantees to pay a sum of money to one or more named beneficiaries when the insured person dies in exchange for premiums the policyholder pays during their lifetime the best life insurance companies have good financial strength a low number of customer complaints high customer satisfaction several policy types available optional riders and easy application processes investopedia theresa chiechitypes of life insurancemany different types of life insurance are available to meet all sorts of consumer needs and preferences depending on the short or long term needs of the person to be insured or their family members the choice of whether to select temporary or permanent life insurance will be a major consideration term life insurance is designed to last a certain number of years then end you choose the term when you take out the policy common terms are 10 20 or 30 years the best term life insurance policies balance affordability with long term financial strength 1many term life insurance policies allow you to renew the contract on an annual basis once the original term ends however since the renewal premiums are based on your current age the cost can rise steeply each year a better solution for permanent coverage is to convert your term life insurance policy into a permanent policy this is not an option on all term life policies so look for a convertible term policy if this is important to you permanent life insurance is more expensive than term but it stays in force throughout the insured s entire life unless the policyholder stops paying the premiums or surrenders the policy some policies allow for automatic premium loans when a premium payment is overdue 2top rated companies to compare | |
when shopping for insurance you might want to start with our list of the best life insurance companies some of which are listed below | term vs permanent life insuranceterm life insurance differs from permanent life insurance in several ways but tends to best meet the needs of most people looking for affordable life insurance coverage term life insurance only lasts for a set period of time and pays a death benefit should the policyholder die before the term has expired that s in contrast to permanent life insurance which stays in effect as long as the policyholder pays the premium another critical difference involves premiums term life is generally much less expensive than permanent life because it does not accumulate cash value before you apply for life insurance you should analyze your financial situation and determine how much money would be required to maintain your beneficiaries standard of living or to meet other financial needs for which you re purchasing a policy also consider how long you ll need coverage to last for example if you are the primary caretaker and have children two and four years old you would want enough insurance to cover your custodial responsibilities until your children are grown and able to support themselves you might research the cost of hiring a nanny and a housekeeper or using commercial child care and cleaning services then perhaps add money for education include any outstanding mortgage and retirement needs for your spouse in your life insurance calculation especially if the spouse earns significantly less or is a stay at home parent total what these costs would be over the next 16 or so years add a little more for inflation and that s the death benefit you might want to buy if you can afford it burial or final expense insurance is a type of permanent life insurance that has a small death benefit despite the name beneficiaries can use the death benefit as they wish | |
what affects your life insurance premiums and costs | many factors can affect the cost of life insurance premiums certain things may be beyond your control but other criteria can be managed to potentially bring down the cost before and even after applying your health and age are the most important factors that determine cost so buying life insurance as soon as you need it is often the best course of action after being approved for an insurance policy if your health improves later and you ve made positive lifestyle changes you can ask to be considered for a change in risk class even if it is found that you re in poorer health than at the initial underwriting your premiums will not go up if you re found to be in better health then you your premiums may decrease you may also be able to buy additional coverage at a lower rate than you initially did investopedia lara antallife insurance buying guidethink about what expenses would need to be covered in the event of your death consider things such as mortgage college tuition credit cards and other debts not to mention funeral expenses also income replacement is a major factor if your spouse or loved ones will need cash flow and are not able to provide it on their own there are helpful tools online to calculate the lump sum that can satisfy any potential expenses that would need to be covered life insurance applications generally require personal and family medical history and beneficiary information you may need to take a medical exam and will need to disclose any preexisting medical conditions history of moving violations duis and any dangerous hobbies such as auto racing or skydiving the following are crucial elements of most life insurance applications standard forms of identification will also be needed before a policy can be written such as your social security card driver s license or u s passport once you ve assembled all of your necessary information you can gather multiple life insurance quotes from different providers based on your research prices can differ markedly from company to company so it s important to make the effort to find the best combination of policy company rating and premium cost because life insurance premiums are something you will likely pay monthly for decades finding the policy that best fits your needs can save you an enormous amount of money our lineup of the best life insurance companies can give you a jump start on your research it lists the companies we ve found to be the best for different types of needs based on our research of nearly 100 carriers benefits of life insurancethere are many benefits to having life insurance below are some of the most important features and protections offered by life insurance policies most people use life insurance to provide money to beneficiaries who would suffer a financial hardship upon the insured s death however for wealthy individuals the tax advantages of life insurance including the tax deferred growth of cash value tax free dividends and tax free death benefits can provide additional strategic opportunities the death benefit of a life insurance policy is usually tax free 3 it may be subject to estate taxes but that s why wealthy individuals sometimes buy permanent life insurance within a trust the trust helps them avoid estate taxes and preserve the value of the estate for their heirs tax avoidance is a law abiding strategy for minimizing one s tax liability and should not be confused with tax evasion which is illegal who needs life insurance life insurance provides financial support to surviving dependents or other beneficiaries after the death of an insured policyholder here are some examples of people who may need life insurance each policy is unique to the insured and insurer it s important to review your policy document to understand what risks your policy covers how much it will pay your beneficiaries and under what circumstances | |
what to do before buying life insurance | because life insurance policies are a major expense and commitment it s critical to do proper due diligence to make sure the company you choose has a solid track record and financial strength given that your heirs may not receive the death benefit until many decades into the future investopedia has evaluated scores of companies that offer all different types of insurance and rated the best in numerous categories life insurance can be a prudent financial tool to hedge your bets and provide protection for your loved ones in case you die while the policy is in force however there are situations in which it makes less sense such if you buy too much or insure people whose income doesn t need to be replaced so it s important to consider several factors before making a decision | |
what expenses couldn t be met if you died if your spouse has a high income and you don t have any children maybe it s not warranted it is still essential to consider the impact of your potential death on a spouse and consider how much financial support they would need to grieve without worrying about returning to work before they re ready however if both spouses income is necessary to maintain a desired lifestyle or meet financial commitments then both spouses may need separate life insurance coverage | if you re buying a policy on another family member s life it s important to ask what are you trying to insure children and seniors really don t have any meaningful income to replace but burial expenses may need to be covered in the event of their death beyond burial expenses a parent may also want to protect their child s future insurability by purchasing a moderate sized policy while they are young doing so allows that parent to ensure that their child has a head start towards protecting their future family financially parents are typically only allowed to purchase life insurance for their children up to 25 of the in force policy on their own lives | |
how life insurance works | a life insurance policy has two main components a death benefit and a premium term life insurance has both two components while permanent or whole life insurance policies also have a cash value component the death benefit or face value is the amount of money the insurance company guarantees to the beneficiaries identified in the policy when the insured dies the insured might be a parent and the beneficiaries might be their children for example the insured will choose the desired face amount based on the beneficiaries estimated future needs the insurance company will determine whether the purchases has an insurable interes in the insured s life the insurer will also decide whether the proposed insured qualifies for the coverage based on the company s underwriting requirements related to age health and any hazardous activities in which the proposed insured participates 6premiums are the money the policyholder pays for insurance the insurer must pay the death benefit when the insured dies if the policyholder pays the premiums as required premiums are determined in part by how likely it is that the insurer will have to pay the policy s death benefit based on the insured s life expectancy factors that influence life expectancy include the insured s age gender medical history occupational hazards and high risk hobbies 6 part of the premium also goes toward the insurance company s operating expenses premiums are higher on policies with larger death benefits for individuals who are at higher risk and on permanent policies that accumulate cash value the cash value of permanent life insurance serves two purposes it is a savings account that the policyholder can use during the life of the insured and the cash accumulates on a tax deferred basis some policies have restrictions on withdrawals depending on how the money is to be used for example the policyholder might take out a loan against the policy s cash value and would pay interest on the loan principal the policyholder can also use the cash value to pay premiums or purchase additional insurance cash value is a living benefit that remains with the insurance company when the insured dies any outstanding loans against the cash value will reduce the policy s death benefit the policy owner and the insured are usually the same person but sometimes they may be different for example a business might buy key person insurance on a crucial employee such as a ceo or an insured might sell their own policy to a third party for cash in a life settlement life insurance riders and policy changesmany insurance companies offer policyholders the option to customize their policies to accommodate their needs riders are the most common way policyholders may modify or change their plans there are many riders but availability depends on the provider the policyholder will typically pay an additional premium for each rider or a fee to exercise the rider though some policies include certain riders in their base premium most permanent life insurance accumulates cash value that the policyholder can borrow against technically you are borrowing money from the insurance company and using your cash value as collateral unlike with other types of loans the policyholder s credit score is not a factor repayment terms can be flexible and the loan interest goes back into the policyholder s cash value account however if you don t pay them back policy loans can reduce your death benefit policies with a cash value or investment component can provide a source of retirement income this opportunity can come with high fees and a lower death benefit so it may only be a good option for individuals who have maxed out other tax advantaged savings and investment accounts the pension maximization strategy described earlier is another way life insurance can fund retirement it s prudent to reevaluate your life insurance needs annually or after significant life events such as divorce marriage the birth or adoption of a child or major purchases such as a house you may need to update the policy s beneficiaries increase your coverage or even reduce your coverage qualifying for life insuranceinsurers evaluate each life insurance applicant on a case by case basis with hundreds of insurers to choose from almost anyone can find an affordable policy that at least partially meets their needs in 2022 there were 912 life insurance and annuity companies in the united states according to the insurance information institute 7on top of that many life insurance companies sell multiple types and sizes of policies and some specialize in meeting specific needs such as policies for people with chronic health conditions there are also brokers who specialize in life insurance and know what different companies offer applicants can work with a broker free of charge to find the insurance they need this means that almost anyone can get some type of life insurance policy if they look hard enough and are willing to pay a high enough price or accept a perhaps less than ideal death benefit insurance is not just for the healthy and wealthy and because the insurance industry is much broader than many consumers realize getting life insurance may be possible and affordable even if previous applications have been denied or quotes have been unaffordable according to industry research firm limra 52 of americans had life insurance in 2023 8in general the younger and healthier you are the easier it will be to qualify for life insurance while the older and less healthy you are the harder it will be certain lifestyle choices such as using tobacco or engaging in risky hobbies such as skydiving also make it harder to qualify or lead to higher rates who needs life insurance you need life insurance if you need to provide security for a spouse children or other family members in the event of your death life insurance death benefits can help beneficiaries pay off a mortgage cover college tuition or help fund retirement permanent life insurance also features a cash value component that builds over time | |
how do you qualify for life insurance | to qualify for life insurance you need to submit an application life insurance is available to almost anyone however the cost or premium level can vary greatly based on your age health and lifestyle some types of life insurance don t require medical information however no exam policies generally have much higher premiums and involve an initial waiting period before the death benefit is available | |
how does life insurance work | life insurance works by providing a death benefit in exchange for paying premiums one popular type of life insurance term life insurance only lasts for a set amount of time such as 10 or 20 years permanent life insurance also features a death benefit but lasts for the life of the policyholder as long as premiums are paid bottom linethere are many types of life insurance policies available each offering a variety of features understanding how life insurance works helps you choose the best coverage for you and your family once you decide what type of insurance you need and how much coverage makes sense for your situation compare products from top life insurance companies to determine the best fit | |
what is a life settlement | a life settlement refers to the sale of an existing insurance policy to a third party for a one time cash payment payment is more than the surrender value but less than the actual death benefit after the sale the purchaser becomes the policy s beneficiary and assumes payment of its premiums by doing so they receive the death benefit when the insured dies a life settlement agreement is closely related to a viatical agreement | |
when an insured party can no longer afford their insurance policy they can sell it for a certain amount of cash to an investor usually an institutional investor the cash payment is primarily tax free for most policy owners the insured person essentially transfers ownership of the policy to the investor as we noted above the insured party receives a cash payment in exchange for the policy more than the surrender value but less than the policy s prescribed payout at death | by selling it the insured person transfers every aspect of the life insurance policy to the new owner this means the investor who takes over the policy inherits and becomes responsible for everything related to the policy including premium payments along with the death benefit so once the insured party dies the new owner who becomes the beneficiary after the transfer receives the payout life settlements are legal for the most part in the u s because life settlements involve a transfer by the policy owner they do not amount to stranger owned life insurance stoli which is illegal | |
why choose a life settlement | there are many reasons why people choose to sell their life insurance policies and are usually only done when the insured person doesn t have a known life threatening illness the majority of people who sell their policies for a life settlement tend to be older people those who need money for retirement but haven t been able to save up enough that s why life settlements are often called senior settlements by receiving a cash payout the insured party can supplement their retirement income with a largely tax free payout other reasons for choosing a life settlement include life settlements generally net the seller more than the policy s surrender value but less than its death benefit life settlements vs viatical settlementspolicy sales became popular during the 1980s when people living with aids had life insurance they didn t need this led to another part of the industry the viatical settlement industry where people who have terminal illnesses sell their policies for cash this part of the industry lost its luster after people with aids began living longer | |
when someone becomes terminally ill and has a very short life span they may sell their life insurance to someone else in exchange for a large lump sum of money the buyer takes on the premium payments becoming the policy s new owner after the insured party dies the new owner receives the death benefit | viatical settlements are generally riskier because the investor basically speculates on the death of the insured even though the original policy owner may be ill there s no way of knowing when they will actually die if the insured person lives longer the policy becomes cheaper but the actual return becomes lower after factoring in premium payments over time special considerationslife settlements effectively create a secondary market for life insurance policies this secondary market has been years in the making there have been a number of judicial rulings that have legitimized the market one of the most notable being the 1911 u s supreme court case of grigsby v russell john burchard wasn t able to keep up the premium payments on his life insurance policy and sold it to his doctor a h grigsby when burchard died grigsby tried to collect the death benefit the executor of burchard s estate sued grigsby to get the money and won but the case ended up in the supreme court in his ruling supreme court justice oliver wendell holmes likened life insurance to regular property he believed the policy could be transferred by the owner at will and had the same legal standing as other types of property like stocks and bonds in addition he said there are rights that come with life insurance as a piece of property who does a life settlement broker represent a life settlement broker represents the policy owner and may be bound by a fiduciary duty to them the broker s job is to find the highest bidder for the policy | |
which life insurance settlement option guarantees payments | a life settlement can be structured as an annuity that will feature guaranteed payments until the death of the policy s beneficiaries | |
what is a single life settlement option | in a single life settlement any payments agreed upon will cease upon the death of the annuitant or beneficiary in contrast a joint life settlement will continue paying out until the annuitant s spouse also passes away assuming they survive the annuitant | |
what is lifestyle creep | lifestyle creep occurs when an individual s standard of living improves as their discretionary income rises and former luxuries become new necessities the rise in discretionary income can happen either through an increase in income or decrease in costs a hallmark of lifestyle creep is a change in thinking and behavior that sees spending on nonessential items as a right rather than a choice this can be seen in the spending decision attitude of you deserve it rather than thinking of the opportunities that saving money would provide a way to fight lifestyle creep is by budgeting and discerning wants from needs when making purchases lifestyle creep explainedlifestyle has the potential to derail retirement plans and debt reduction as frugality is replaced by spendthriftness lifestyle creep can start small ordering a more expensive bottle of wine at dinner or buying a bag or electronic item you do not really need but can quickly extend to more extravagant habits easily accessible credit and the use of credit cards which enable bigger purchases may contribute to lifestyle creep budgeting and willpower can be leveraged to avoid lifestyle creep some examples of lifestyle creep include lifestyle creep and near retireeslifestyle creep can be particularly problematic for individuals approaching retirement such individuals at five to 10 years before retirement are typically in their peak earning years and have already paid off their longstanding recurring expenses such as a mortgage or child related costs feeling flush with their newfound surplus of discretionary income they may opt for more expensive cars pricier vacations a second home or a newfound affinity for luxury goods since the goal in retirement is to maintain the lifestyle one has become accustomed to in the years preceding retirement these retirees require more funds to support their more lavish lifestyles unfortunately they lack the resources to do this because they have spent their surplus cash flow rather than saved it to bolster a more comfortable retirement lifestyle creep and younger saverslifestyle creep can also be felt by younger consumers and retirement savers such as when they land their first well paying job spending habits can quickly change to include items that were previously considered luxuries such behavior can make it harder to save for buying a first home retirement or quickly pay down educational debt individuals who fear falling into such a spending trap should consider writing down their life and money goals and using them as a guide to spending decisions | |
what is lifetime cost | lifetime cost is an estimate of how much an item such as a car a home or a piece of industrial machinery will cost to own over the expected useful life of that item it also includes cost of purchasing the item in the first place understanding and calculating lifetime costbusinesses will frequently calculate lifetime costs before making large expenditures upgrades or renovations for example if they are buying a new piece of machinery they will not only consider what it costs to buy initially but also what it s likely to cost to operate and maintain over its expected lifetime lifetime cost may also be referred to as whole life cost life cycle cost or total cost of ownership individual consumers can also find it useful to calculate the lifetime cost before buying a home boat automobile or other expensive item besides the initial purchase price lifetime costs can include as a simple example if a person bought a fur coat the lifetime cost would include the purchase price as well as the expense of cleaning storing insuring and otherwise maintaining the coat often the lifetime cost of an item may be far greater than the initial purchase price many boat owners for example will recognize the truth of the old saying that the definition of a boat is a hole in the water into which you throw money in addition to lifetime cost it can also be useful to look at the opportunity cost of a particular expenditure that refers to the potential benefits of spending the same amount of money in a different manner such as investing it | |
how debt adds to lifetime cost | lifetime costs can also include debt repayments for example the lifetime cost of an item financed through a credit card or line of credit loc can be much greater than the purchase would have cost had it been paid for with cash unless the debt is paid off right away the interest and fees on the credit card or credit line will add to the lifetime cost of the item the most dramatic example for most consumers would be the purchase of a home for example consider a 300 000 home purchased with a 20 down payment and a 30 year mortgage with an annual percentage rate of 7 assuming the homeowner keeps that home and mortgage for the next 30 years by the time it is fully paid off they will have paid about 335 445 in interest on the 240 000 they borrowed together with the 60 000 they put down initially the repayment of the loan s 240 000 principal and the 335 445 in interest the 300 000 home will have cost them 635 445 more than twice the original purchase price and that of course doesn t include all the other lifetime costs associated with a home such as property taxes homeowners insurance and routine maintenance nor does it include the opportunity cost of using that money differently that s the total amount that americans pay in credit card interest and fees each year as estimated by the consumer financial protection bureau 1 using credit cards to purchase items can add to their lifetime cost unless the consumer pays their monthly balance in full real world example of lifetime costa car buyer will often compare makes and models prices desired features and different dealers financing offers before making their purchase however the cost of the vehicle does not end at the car lot consider the costs involved with weekly gas fill ups periodic oil changes auto insurance as well as licensing and vehicle inspection fees other expenses may include a roadside assistance plan car washes and parking or garage rent so for budgeting purposes it makes sense to look not just at the vehicle s initial price but at what it will cost on an ongoing basis not only are some cars cheaper than others but some may also be less expensive to maintain it can also be the case that a car that s initially more expensive will be less costly on an annual basis making it a better buy in the long run the u s department of energy has an online vehicle cost calculator that allows users to compare the operating costs of up to eight different makes and models based on how much they drive according to the american automobile association the average new car costs 10 728 to own and operate that includes loan finance charges gasoline maintenance insurance license and registration fees and depreciation 2 | |
what is depreciation | depreciation is an accounting method that is used to allocate the cost of a particular item over its useful lifetime for example a piece of office equipment that is expected to last for five years would lose 20 of its value every year until it has been fully depreciated depreciation is often taken into account in estimating the lifetime cost of an item | |
what is residual value | residual value refers to what an asset is worth after it has been fully depreciated for accounting purposes the item may still be saleable to another buyer in which case the seller will recoup some of the item s expected lifetime cost a car for example may still have some resale or trade in value even if you ve driven it for quite a few years the bottom linelifetime cost is a useful way to estimate how much a particular item will cost to own and can be especially important in high ticket purchasing decisions | |
what is the lifetime learning credit llc | the lifetime learning credit llc is a provision of the u s federal income tax code that lets parents and students lower their tax liability by up to 2 000 to help offset higher education expenses unfortunately the llc is not refundable which means you can use the llc to pay the taxes you owe but you don t get a refund back of any of the credit according to the internal revenue service irs 1this credit may be claimed year after year without a limit however it cannot be combined with the american opportunity tax credit in the same tax year 1 | |
how the lifetime learning credit llc works | the llc may be claimed when a student is enrolled in undergraduate graduate or professional degree courses the credit may also be used for courses in specific career related skills 1to be eligible for the credit a student must be enrolled at an educational institution considered eligible by the internal revenue service and they must be taking higher education courses towards a degree or a recognized educational credential that provides or improves job skills 1finally the student must be enrolled at a qualifying institution for at least one academic period that began within the tax year for which they re claiming the credit the irs defines academic period as a semester trimester quarter summer session or other period determined by the school 1according to the irs an eligible educational institution is a school offering higher education beyond high school it is any college university vocational school or other post secondary educational institution eligible to participate in a federal student aid program run by the u s department of education 3income limitations for the llcin order to claim the full credit a taxpayer s modified adjusted gross income magi for the tax year 2022 must be 80 000 or less if they file as an individual for taxpayers filing jointly income must be 160 000 or less individual taxpayers with magi of at least 90 000 or couples filing a joint return with magi of at least 180 000 do not quality for the credit 4the credit is phased out for those taxpayers with modified adjusted gross income in excess of those amounts and those who are phased out cannot claim the 2 000 credit at all the modified adjusted gross income amount used by joint filers to determine the reduction in the llc according to the irs was not adjusted for inflation for taxable years beginning after december 31 2020 41 | |
how to claim the llc | to be eligible to claim the aotc or llc the law requires a taxpayer or their dependent to get form 1098 t tuition statement from an eligible educational institution this statement helps you determine what your credit will be the form will have an amount in box 1 to show the amounts received during the year but this amount may not be the amount you can claim there are several qualified education expenses beyond tuition that can affect what amount to claim 1check the form 1098 t to make sure it is correct if it isn t correct or you do not receive the form contact your school to claim the llc you must complete form 8863 attach the completed form to your form 1040 or form 1040 sr 1you cannot claim the american opportunity credit and the lifetime learning credit at the same time figure out what you are eligible for and what is best for your situation 5other tax credits related to education expensesthe u s government subsidizes individuals higher education expenses through tax credits tax deductions and tax advantaged savings plans each of these programs lowers income tax liability for students or their parents the subsidies include the lifetime learning credit the american opportunity tax credit aotc the tuition and fees deduction and 529 savings plans 6the aotc is a credit specifically for education expenses during the first four years of higher education the aotc offers a maximum annual credit of 2 500 per eligible student if the credit brings the amount of tax you owe to zero you can have 40 of any remaining amount of the credit up to 1 000 refunded to you 2the tuition and fees deduction allows taxpayers to deduct up to 4 000 from their taxable income in eligible higher education expenses when filing their taxes 7 a 529 savings plan is designed to help people to save money for future tuition usually for their children or grandchildren through a tax advantaged savings plan 8the irs also publishes an interactive mobile application am i eligible to claim an education credit that students can use to find out if they are eligible to claim an education credit | |
how much is the lifetime learning credit | the llc is worth up to 2 000 or 20 of the first 10 000 of qualified education expenses each tax year depending on your magi 1 | |
how many times can you claim the lifetime learning credit | there is no limit to the number of times you can claim the lcc during your lifetime if you are eligible you can claim it every tax year 1can parents claim the lifetime learning credit yes parents can claim the lifetime learning credit on the behalf of a dependent child however you can only claim it once so if you have four children you still only get the maximum amount of the credit which is 2 000 per tax return you don t get the credit for each child 1 | |
what s the difference between the american opportunity credit and the lifetime learning credit | the american opportunity credit formerly the hope credit can be used for the first four years of undergraduate studies only the lifetime learning credit can be used for undergraduate and graduate studies plus some professional programs and trade schools may be eligible the american opportunity credit is worth up to 2 500 and if you have more than one student listed as a dependent you may claim multiple credits the lifetime learning credit can only be used once for up to 2 000 on an annual tax return 21 | |
when does the lifetime learning credit expire | the llc doesn t expire you can use it annually for as many years as you qualify for the credit 1the bottom linethe u s government s tax credits tax deductions and tax advantaged savings plans are all useful tools to help afford the rising costs of higher education if you are eligible for these subsidies it is worthwhile to fill out the necessary paperwork at tax time those who qualify for the lifetime learning credit will find it a good way to help afford both undergraduate and graduate school plus professional degree courses and programs that assist with acquiring and improving job skills | |
what is a lifo liquidation | a lifo liquidation is when a company sells the most recently acquired inventory first it occurs when a company that uses the last in first out lifo inventory costing method liquidates its older lifo inventory a lifo liquidation occurs when current sales exceed purchases resulting in the liquidation of any inventory not sold in a previous period | |
how a lifo liquidation works | the lifo method is a financial practice in which a company sells the most recent inventory purchased first lifo matches the most recent costs against current revenues some companies use the lifo method during periods of inflation when the cost to purchase inventory increases over time the lifo method provides tax benefits as the higher costs associated with new inventories seemingly offset profits resulting in a lower tax burden lifo liquidation exampleabc company uses the lifo method of inventory accounting for its domestic stores it purchased 1 million units of a product annually for three years the per unit cost is 10 in year one 12 in year two and 14 in year three and abc sells each unit for 50 it sold 500 000 units of the product in each of the first three years leaving a total of 1 5 million units on hand assuming that demand will remain constant it only purchases 500 000 units in year four at 15 per unit despite its forecast consumer demand for the product increased abc sold 1 000 000 units in year four under the lifo method 500 000 units from year four are liquidated resulting in revenues of 25 million cogs of 7 5 million and gross profits of 17 5 million and 500 000 units from year three are liquidated resulting in revenues of 25 million cogs of 7 million and gross profits of 18 million gross profit revenues cogs | |
what is lifo reserve | lifo reserve is an accounting term that measures the difference between the first in first out fifo and last in first out lifo cost of inventory for bookkeeping purposes the lifo reserve is an account used to bridge the gap between fifo and lifo costs when a company uses the fifo method to track its inventory but reports under the lifo method in the preparation of its financial statements understanding lifo reservethe fifo method of evaluating inventory is where the goods or services produced first are the goods or services sold first or disposed of first the lifo method of evaluating inventory is when the goods or services produced last are the ones to be sold or disposed of first the lifo reserve comes about because most businesses use the fifo or standard cost method for internal use and the lifo method for external reporting as is the case with tax preparation this is advantageous in periods of rising prices because it reduces a company s tax burden when it reports using the lifo method the lifo reserve is known as a contra inventory account a contra account s balance is the opposite of the account it is associated with lifo vs fifofor example when using the lifo method for inventory accounting in periods of rising prices the cost of reported inventory is higher than the fifo method which therefore increases a company s cost of goods sold cogs decreasing its pre tax earnings when pre tax earnings are lower there is a lower amount to pay taxes on thus fewer taxes paid overall then for internal purposes such as in the case of investor reporting the same company can use the fifo method of inventory accounting which reports lower costs and higher margins which is attractive to investors in periods of rising prices constant increases in costs can create a credit balance in the lifo reserve which results in reduced inventory costs when reported on the balance sheet almost all analysts look at a publicly traded company s lifo reserve often earnings need to be adjusted for changes in the lifo reserve as in adjusted ebitda and some types of adjusted earnings per share eps calculating lifo reserve |
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