MEC Modified Endowment Contract?

[capjak]

Had a dinner last night and got a pitch for Modified Endowment Contract.
Guaranteed 3% per year, A+ rated insurance company, liquid after the 1st year, life insurance benefit plus a dividend paid every year to put yield close to 4% and no tax deferred until distribution. Yada, Yada, ......

Hmm sounds like another alternative to safe money. Anyone have one? I am looking to see how many pages this thing is to read, guessing a very long read of legal ease..

Dinner was very good included dessert and wine....This thing must have high commissions...

 

[Gumby]

The issue with MECs is the tax treatment of withdrawals. Whole life insurance is more favorable. This is a good description of the issue. Modified Endowment Contract (MEC) Explained - Life Ant

 

[ugeauxgirl]

It does have high commissions- like every insurance product. A MEC is a CLASSIFICATION of a life insurance policy. A policy will become a MEC if you pay the premiums all at once (single premium) or over only a few years. It isn't safe money- the MEC is life insurance and borrowing from a MEC is much more taxable than another sort of policy. MEC is actually a penalty classification from the IRS. Insurance policies have preferential tax treatment and the IRS doesn't want you dumping a bunch of money in a policy and then borrowing it tax free. if you intend to borrow, buy a policy in which the premium is paid over 7 years or more.

 

[capjak]

It does have high commissions- like every insurance product. A MEC is a CLASSIFICATION of a life insurance policy. A policy will become a MEC if you pay the premiums all at once (single premium) or over only a few years. It isn't safe money- the MEC is life insurance and borrowing from a MEC is much more taxable than another sort of policy. MEC is actually a penalty classification from the IRS. Insurance policies have preferential tax treatment and the IRS doesn't want you dumping a bunch of money in a policy and then borrowing it tax free. if you intend to borrow, buy a policy in which the premium is paid over 7 years or more.

Yes I found it interesting that they were pushing a product that is basically considered a "negative", i.e overfunded life insure (7x rule) that as a result is no longer tax free/deferred, strange. But it sure sounded good

 

[meierlde]

Yes I found it interesting that they were pushing a product that is basically considered a "negative", i.e overfunded life insure (7x rule) that as a result is no longer tax free/deferred, strange. But it sure sounded good

Note that a lot of prepaid funeral produces use essentially the MEC model being single premium life insurance. In this case since the policy pays off after death no taxes are due.
It should be noted that if you cash in the entire policy (i.e. surrender the policy for cash value) the MEC and multiple pay life insurance have the same effect on taxes.
So you could use a single pay policy to handle final expenses but instead of being sold by a funeral home, you could own the policy yourself.

 

[copyright1997reloaded]

Reviving a deceased thread here.

I have a ex-mega corp term life policy that allows for additional optional premiums. The optional premiums earn 4% (minimum) tax-deferred.

In trying to understand possible gotcha's with this, I ran across a discussion of the fact that if "too much" money was contributed to the cash accumulation fund, that the policy would then become a Modified Endowment Contract (MEC). The "too much" apparently is complicated and depends both on the total amount in the cash accumulation fund and any given contribution.

I have a call into Prudential (keeper of mega-corp Group Term Life Insurance), who has told me they need to research the answer and will call me back in 7 or so days.

In the meantime, I started searching for calculators and/or spreadsheets but have yet to come up with anything.

Any ideas out there?

 

[mickeyd]

If you need LI, buy term insurance. End of LI suggestion.

 

[copyright1997reloaded]

If you need LI, buy term insurance. End of LI suggestion.

Please re-read what I posted. I [already] have a ex-mega corp term life policy.

I have no intention to buy any (additional) life insurance product, whether term or any other.

My question has to do with leveraging a cash accumulation option of an existing (what was) low cost term life policy, which is getting more expensive as I age. If anything, I will be reducing it, but before doing so I am trying to understand the cash accumulation option and whether it provides a means of 4% tax-deferred growth.

 

[copyright1997reloaded]

For anyone curious, the max Cash Accumulation values as relayed by GUL insurance company:
Age 61 male - $53,800 (for 100K term policy taken out 20+ years ago)
Age 63 female - $56,000 (again on 100K policy)
This is for a 4% (no fee) minimum return. Tax free withdraws if taken by beneficiary.