Most people think that creating a Modified Endowment Contract (MEC) is a bad thing. We discussed that at some length in last week's episode.
That's mainly because the tax advantages of using life insurance are pretty widely known and discussed my agents…ourselves included. So, why in the world would anyone want to intentionally make the cash value taxable by using a MEC?
Good question. Losing the tax benefits can be a negative thing…especially if creating a MEC was not your intention.
But there are times when intentionally owning a modified endowment contract might make sense.
Here are a couple examples of that:
- You are disappointed with the interest rates offered in fixed annuities and CD's presently. (Honestly, I think everyone is). A lump sum paid into a permanent life insurance policy could produce a better return with a similar risk profile to a fixed annuity or CD.
- You have no intention of spending the money and have a definite plan to leave some amount of money to loved ones and/or a charity of your choice. The death benefit paid by a MEC (like life insurance) passes to your beneficiary(s) without an income tax consequence to them.
And if you'd like to follow along with the number that Brandon uses as an example, here is the data that was compiled for comparison:
Now, before I have to delete a bunch of nasty comments and field the hate mail, I'd like to say that we're not advocating the use of MEC's as an absolute. It's an alternative and it should only be used by someone who has a firm grasp of the ramifications of doing so.
Income Case study
Deferred Income Annuity (DIA) vs. Modified Endowment Contract (MEC)
55 y/o male $150,000 that he would like to convert to an income at 65
DIA produces $1,505.70 monthly income
MEC produces $1,907.25 monthly income (non-guaranteed)
Legacy Play Case Study
Lump sum of cash that you don’t want to give up, but plan to leave behind to loved ones and/or charity
70 y/o male with $500,000 lump sum
Immediately worth over $800,000 at inception
By age 85 over $1.1 million that’s nearly a 5.5% return on the money. Find me a CD or annuity that can produce that sort of growth and don’t forget that the transfer of cash is income tax free because it’s a death benefit
If you'd like to hear us talk more about these examples in detail plus more, listen to the full episode.