What is a MEC (Modified Endowment Contract)? | High Cash Value Whole Life Insurance

In this video we review what a modified endowment contract is (MEC) , why it is important to understand, the basics of the IRS code around it, and how it is set for maximum efficiency in a high cash value whole life policy.

A (MEC) is a tax qualification of a life insurance policy whose funding exceeds federal tax law limits

The taxation structure and IRS policy classification permanently change after a life insurance policy turns into a modified MEC

7702 of the Tax Code differentiates between income from a genuine insurance product and income from an investment vehicle

Policy fails 7702 criteria becomes a MEC, loses favorable tax treatment
Non-MEC / Normal:
1) Growth is tax deferred
2) Cash value can be accessed tax free

MEC’d Policy
1) Growth is tax deferred
2) Cash value can be accessed, but:
2a. Gains will be considered income taxable
2b. If less than 59 ½ y/o, will get hit with a 10% penalty

Age & death benefit determine a MEC limit. The MEC limit should be set based on a $ value you want the ability to pay into a life insurance policy. A MEC can be set at any level you want! Design can set the MEC limit at $1k, $10k, $1M, etc

Example, in a Mass Mutual 15 pay product with a target max funding outlay of $50,000 for 10 years the MEC limit in this case was set at $50,019.19 which is just above the funding target! But it also is not too high meaning the death benefit is not too high causing unnecessary expenses and insurance costs for this particular clients goals of high cash value & efficient growth.

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At Alpha Crusaders LLC, our insurance experts help clients build wealth tax-free and provide full transparency on how to maximize your legacy.

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All advice and/or opinions expressed in our videos are the result of our experience in the insurance and financial industries. Any action taken based on the information expressed in our videos is the sole responsibility of the viewer. All content produced is for informational purposes only.

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