What is a Modified Endowment Contract, and what does it have to do with life insurance? https://www.youtube.com/watch?v=qXI-iOZylhU If you’re using Infinite Banking as a savings tool, you want to avoid having your policy become a MEC. But what exactly are modified endowment contracts? How does it change the taxation on your life insurance policy? Why does it exist, and when might you want to use a MEC? If you want to know more about how to use Infinite Banking to accomplish your financial goals… tune in now! Table of contentsWhy the MEC Rule ExistsDefining the Modified Endowment ContractHow Modified Endowment Contracts WorkThe Tax Consequences of Modified Endowment ContractsThe 7-Pay TestIs There An Upside to Having a Modified Endowment Contract?How to Avoid MEC StatusStay Strategic, Not OverfundedBook A Strategy Call: Build a Policy That Works for YouWe offer two powerful ways to help you create lasting impact: Why the MEC Rule Exists Back in the late 1980s, the IRS noticed that some people were putting large sums of money into life insurance policies, not to protect their families, but to take advantage of the tax-free growth. These policies were being used more like investment vehicles than insurance. So in 1988, Congress stepped in and created the Modified Endowment Contract rule as part of the Technical and Miscellaneous Revenue Act (TAMRA). The goal wasn’t to punish anyone. It was to make sure that life insurance stayed true to its original purpose - protecting families, not becoming a tax shelter. A modified endowment contract life insurance policy is simply one that crosses the funding limits and gets reclassified for tax purposes. MEC rules don’t penalize policyholders; they just keep life insurance structured fairly. By drawing a line between insurance and investment, the IRS helped preserve the benefits of permanent life insurance for those who use it as intended. Defining the Modified Endowment Contract There are a lot of great reasons to have a whole life insurance policy. This includes tax advantages, uninterrupted compounding growth, and income protection. It’s the ideal vehicle for an infinite banking strategy; however, you can lose these benefits if you overfund your policy. When you put too much money into a whole life insurance policy, it becomes something called a Modified Endowment Contract. When a policy becomes an MEC, it loses its tax advantages. The IRS created this legislation to cut down on what they deemed as taking advantage of life insurance. The original purpose of life insurance's tax advantages was to incentivize people to buy insurance. That’s because life insurance can protect families financially from a loss of income during a difficult time. This also prevents the government from having to commit tax dollars toward supporting these families. The government first implemented these benefits with a specific purpose in mind: to be a win for families. They didn't create the advantages as a loophole. In order to protect the original intent of life insurance—to provide a death benefit—the IRS decided that if policyholders didn’t follow certain guidelines, it would functionally be classified as an investment, rather than an insurance policy. How Modified Endowment Contracts Work Let’s consider an example. Say you want to buy a life insurance policy with a $1 million death benefit. The least you can pay, or the “floor,” is going to be term insurance. This is the most affordable premium option; however, it only includes the temporary death benefit and nothing more. What you can pay on a million-dollar policy, however, is a sliding scale. You can have different life insurance products or structures that change the premium. For example, you can have whole life insurance, structured in a few different ways. Typically, the higher your premium, the more benefits you get, including living benefits like a cash value account. A whole life insurance policy structured for infinite banking is at the top of
Published on 3 years, 10 months ago
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