A Modified Endowment Contract (MEC) is simply a permanent life insurance policy gone awry. In layman’s terms, a MEC is a life insurance policy into which the policy-owner put too much money into it too fast. This results in any distribution taken from the policy (including loans) are taxed as ordinary income. If you are younger than 59 1/2 when you take the distribution, tack on a 10% penalty courtesy of the IRS. Distributions include collateral assignments, cash dividends, dividends applied for any purpose other than to reduce premiums on the same contract, full and partial surrenders and account withdrawals.
How do you MEC a life insurance policy? Answer: by paying too much into a policy over the first seven years. This amount is determined by the IRS, who sets the maximum amount of premium that can be paid into a policy for the first seven years from the date of issue. Also, you can’t avoid MEC by simply paying less in later years. Once you exceed this limit, it’s like jumping off a bridge: you can’t undo it!
The best way to avoid MECing your life insurance policy is to have your initial life insurance illustration run to avoid it. If your agent is competent, he or she will take care of that for you – but it’s worth the question so that you’re not surprised later. Life insurance software will automatically run your illustration to avoid MEC. Yes, it’s that simple. Want more info? Go to: http://www.thriftytermquote.com/
Confused by all the commercials advertising life insurance? One says its for their kids’ college; the next one says they can’t be turned down for medical reasons; the next one says they have the lowest prices… It’s enough to make you turn the channel and want to forget you ever asked!
The objective of this article is to cut through the clutter and let you know what’s out there and when to use it. So let’s get started:
1. Life Insurance for College (or whatever) Funding. The “college funding” policy referred to in that very annoying Gerber TV ad (my wife and I can’t hit the “mute” button fast enough whenever it comes on) is nothing more than a simple whole life policy. Whole Life policies accumulate cash value on a very conservative (read: slow) basis. Since the policy “endows,” which means that the cash value should be equal to the face amount by the time the hopeful parents need it, the premiums will be very high. Also, life insurance has been marketed as a college-funding vehicle for decades so this idea is definitely not “different.”
2. Can’t be Turned Down for Medical Reasons. This is nothing more than Simplified Issue (SI) Whole Life Insurance. Since SI accepts basically everybody into its plan, the premium will be far higher than that of an individually-underwritten life insurance policy. If you are relatively healthy, you’d be better off going with a No-Lapse Guarantee Universal Life policy where the premiums will almost certainly be lower. Yes, you have to get a physical (called a paramed exam) but that’s nothing compared to the money you’ll be burning on an over-priced life insurance policy! Should we alert Alex Trebek?
3. Lowest Prices. This is the “holy grail” of the life insurance industry: get the most for the least. I am certainly not arguing with the concept (hence my website) but remember: there are trade offs with everything. If you want alot of life insurance for just a little money, then term insurance is for you. This is sometimes referred to as “pure insurance” as it only provides life insurance and nothing else such as cash value or lifetime guarantees. Also, the low premium generally expires after a certain period of time. For example, if you buy a twenty-year term policy, the premiums will remain the same for twenty years and then skyrocket to the tune of five to fifteen times what you were paying. The idea of term insurance, therefore, is to cover a temporary need such as a mortgage, the kid’s college or any other large debt.
As you have seen from previous articles, Estate Planning is fraught with pitfalls. Many times, people will attempt to build their own estate plan but, unfortunately, don’t know what questions to ask. My goal is to help you understand the issues that face even modest estates.
A. Improper Disposition of Assets. This occurs whenever the wrong asset goes to the wrong person in the wrong manner or in the wrong time-frame. For example, leaving an entire, complex estate to a spouse who is unprepared or unwilling to handle it. Leaving a sizable estate to a teenage is another good example. The solution is to consider a trust or custodial arrangement and to provide in the Will for young or legally incompetent people. Also, an often overlooked consideration is a “common-disaster” provision so that assets can avoid needless second probates and double inheritance taxes.
B. Ensuring that your business is a Going Concern. What happens to your business if a key revenue-generating employee dies or is disabled unexpectedly? Do you have a “shock absorber” in place? Key employee life and disability insurance coupled with good business overhead coverage will certainly help.
C. Buy-Sell Agreements are essential if your business is to survive the death or disability of one of the owners. Unfortunately, many business: have no such agreement; or the agreement isn’t in writing; or the price doesn’t reflect the current value of the business; or the agreement isn’t properly funded. The bottom line is that the heirs are not guaranteed the fair market value to which they are entitled. If you think you’ll skate by giving a grieving widow a value for her share that “the accountant came up with,” think again. I know of many cases in which that kind of “solution” wound up being settled by lawyers.
This is one of the most important tools to help you determine if your “permanent” life insurance policy is, in fact, permanent. When you first bought your permanent life insurance policy, which could be Universal Life, Variable Life or Whole Life Insurance, you were given a life insurance “illustration.” Your illustration, among other things, projects how long your policy is going to last. While your life insurance illustration must meet certain regulatory requirements, it also is limited by the linear nature of the returns it projects for your policy. In layman’s terms, neither the carrier or anyone else has any way of knowing what the returns are going to be on your premiums dollars. Therefore, it projects whatever it’s making now (called the “Current Rate”) out to infinity. This has obvious flaws. The bottom line is that, unless you have a No-Lapse Guarantee life insurance policy, no one can know if your policy is going to be around when your family needs it.
The best way to determine how your policy is doing is to run an “in-force” life insurance illustration. If you have a Variable Universal Life Insurance policy, make sure your agent runs the illustration at a low rate of return, say, at 4%. This will prevent him or her from manipulating the results. For any other type of policy, your in-force illustration will be run at the Current Rate.
For best results, have one run every year or two. That way, you’ll keep on top of it and will be less likely to get a nasty surprise in the form of a “Lapse Notice.” For more info, please go to: http://www.thriftytermquote.com/