Living Benefits: Is this something?

As a single pay plan, it’s automatically considered a Modified Endowment Contract (MEC).

And what the heck is that, you ask?

Well, a “modified endowment contract (commonly referred to as a MEC) is a tax qualification of a life insurance policy which has been funded with more money than allowed under federal tax laws … Essentially a life insurance contract which becomes a MEC is treated like a non qualified annuity by the IRS for taxation purposes prior to the insured persons passing.”

In other words, the money coming out of such a plan would be on a LIFO (last in, first out) basis, so when one pulls out that $75,000 at least some of that is taxable as income (and depending on age, may be subject to a 10% penalty). Also, that $75,00 is not a “withdrawal,” it is a loan, and most companies charge 7% or 8% interest on outstanding loan balances (and that’s on the whole $75,000).

Ouch.

But what does that mean “in real life?”

I ran a Single Pay WL quote with our primary carrier (figuring it would be pretty industry average) as a baseline. 

But: the whole $75,000 is a loan, and the interest on that is 8% (I presume that’s fairly common). So the interest charged is $6,000.

Per year.

Every year.

Here’s where it gets “fun:”

If one is smart, one is paying that $6,000 every year so that the loan doesn’t snowball. In about 12 years (maybe less), one has just paid the carrier back the $75,000 (in $6,000 per year increments), and still has to keep paying. We call that “in the hole.”

Or, perhaps one decides not to pay it, and the carrier deducts the $6,000 from the remaining cash value (remember: that’s about $25,000). That’s gonna go away pretty fast, no? And then one has nothing.

No, wait: one still has the $75,000 one took out (and paid some taxes on) . After giving the carrier $100,000 of one’s own money.

#Winning!

Now, why wouldn’t the carrier love this?