There are two different ways to make use of life insurance as a
viable investment alternative.
Many people have a difficult time with this concept. Just remember
that the industry has many privileged benefits. The purpose is to
make us of these benefits in a creative and personally beneficial
manner.
Both the MEC and life insurance have a tremendous estate planning
benefit.
It is another of the inherent advantages to the life insurance
industry. The benefit is that, if there is
a named beneficiary, all of the death benefit will flow to the
beneficiary free of all income tax! Yes, income tax free! This is
one advantage that a MEC and life insurance have over an annuity.
All interest from an annuity is taxable to the beneficiary at death.
One thing that an annuity, a MEC and life insurance have in common
is that all funds will avoid probate at death, as long as there is a
named beneficiary. This, again, is another advantage that
the industry has over most of its competitors.
As with annuities, there are thousands of MEC’s and life insurance
policies issued by hundreds of life insurance companies. Choosing
the right one is a process that must begin with an understanding of
the desires and special circumstances of each individual.
This is why there are no recommended MEC’s or life insurance
policies listed on this site.
Modified Endowment Contract (MEC)
The most common and most easily structured method is called a
Modified Endowment Contract (MEC). All, or principally all, of the
funds are deposited with the insurance company within the first few
years of contract issue. Because of this early deposit, interest
withdrawals from a MEC are taxable income. Of course, withdrawals of
principal are not taxable.
For the interest withdrawals to be income tax free the money must be
deposited in just about equal installments over a seven year period.
When this is done the policy is not a MEC, it is simply a life
insurance policy. In a life insurance policy interest can be
accessed via a loan.
Generally loans are not taxable. This is why that loans from a life
insurance policy (not a MEC) are usually not income taxed.
The loan interest with most companies is a net 0%, i.e. no cost
loans. Interest coming out of a Modified Endowment Contract (MEC) is
a withdrawal, not a loan. The bottom line is that interest from
a MEC is a taxable withdrawal and interest from a life insurance
policy is a loan and not taxed. Therefore, the interest with a MEC
is tax deferred and the interest is tax free with a properly
structured life insurance policy.
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Recommendations will be given after a meeting in person, either at
your home, or at a place of your choosing. All suggestions will,
however, be with highly rated, large and reputable legal reserve
life insurance companies.
