Amended Endowment Agreement is Mostly An adverse reclassification of a life insurance contract that strips it of most of the tax preferential features is cash value life insurance.
There are many subtle but significant tax consequences of owning a MEC. A large and often overlooked capital loan is the taxable income recognized on the outstanding debt for interest. This means that when you take a loan it will earn interest. When you have a MEC and your cash value exceeds the amount of premium you paid, the loan is taxable income. If you allow interest to be part of the outstanding debt, the loan interest may become additional taxable income.
Many agents learn very early in their careers that MEC is bad, and most people who do research on life insurance come up with the same notion.
Although not every case includes an amended endowment contract, which is necessarily a doomsday, the reasons for themselves are few and far between. That said, how easy is it to actually do one?
How do you avoid a modified endowment contract?
You do not pay a premium either to avoid a revised payment contract that violates the 7 pay test or does not reduce the death benefit to a level that violates the 7 pay test within the 7 year test period is. It sounds simple, and in truth it is. But for Leperson, it’s a lot of intimidating work.
We take it up because many people worry about their life insurance policies becoming MECs. Many people get away with the notion that it can happen by mistake and then they can stop any kind of excrement disease without any propulsion.
But is this fear of war? Our vast experience says no.
One must understand that all life insurers test cash value life insurance policies for MEC compliance with every premium received. If a breach occurs, the insurer informs the owner of the policy. In fact, most insurers return the premium to the policy owner or hold the premium in the limo awaiting instructions from the policy owner about what he wants to do with the access premium.
So even if you are not paying as much attention to your policy and you cross the line violating the 7 pay test, the insurer will intervene and ensure that you actually intend to do what you are going to do. .
We have never seen a situation where an insurer allowed someone to pay premiums, violated the MEC test, and there was no warning. Quite the opposite. Lots of warning bells go off.
So here is the really good news, Ones is not really up to the policyholder to find out if he has / has MEC. The insurance company will look after him / her.
But what about life insurance that the policy will eventually become a MEC?
It is based on Planned to Future premium. There is nothing you can do on a policy issue that will ensure that your policy will eventually become MEC. In other words, you cannot be put to death in the context of a MEC violation. You must either pay the premium or reduce the death benefit of the year an estimate Violation. This means that you can avoid anticipated violations in the future, not what you will do in that year.
But what about those who buy a MEC without knowing it?
It is difficult to do. is very difficult. The industry adopted a plethora of disclosures that would not allow the prospective policyholder to proceed without signing the fact that it was purchasing an amended endowment contract.
Here is an example of such a disclosure from a major mutual insurance company:
I highlighted the section that specifically stated the purpose of this disclosure. Also note that the title of this document in bold letters at the top right: Amended Endowment Agreement Information and Gratitude.
Any MassMutual policyholder (current or future) who does something for a company-issued life insurance policy that violates the 7 pay test should sign this form.
Can an amended endowment contract be reversed?
Yes, you can reverse the violation of the 7 pay test and prevent the creation of a revised endowment contract. You request the insurance company to refund the premium you paid for violating the 7 pay threshold. You have up to 60 days After The end of the policy year in which the violation occurred. This is plenty of time for most situations, and this brings me to my next point.
Given all the warnings and times, a 7P breach has to be avoided / reversed, the notion that one might accidentally create a MEC does not know it, and then doing nothing about it becomes more suspicious by the other is.
We have also worked in some situations where the insurance company made an error and wondered what happened when it was not breached. There were a number of warning letters issued, and it was more than welcome to undo the payment that we made the breach. Once the company recognized their error, it was discovered that nothing was to be done. A minor inconvenience, but also peace of mind knowing what triggers the system.
Bottom Line: It’s not so easy to create a MEC
So some of the MEC horror stories that you can read on the interweb are largely overblown by financial “gurus” who either want to throw a shadow over cash value life insurance or who are really into the subject. Don’t know much This is extremely difficult if it is not impossible to create a MEC by mistake and you really have to go out of your way to just buy one.
Of all the people I personally met with a MEC, they either ended up with one when they first bought the policy (eg single premium life insurance) or they intentionally paid the premium in a policy that Created a revised endowment contract. I can recall more than a handful of times where our clients have crossed the 7 pay limit and received enough warning that this premium changes their policies to MEC.