The Jacobs Company; Definitions

The Jacobs Company
Definitions

Retaining Tax Benefits of Life Insurance

You can lose some of the tax advantages of a life insurance plan by paying too much premium too quickly. On every UL and VUL contract, there is a certain premium that you should not exceed, referred to as the MEC (Modified Endowment Contract) premium. The MEC premium is based on the age of the customer and the amount of insurance being purchased. If this premium is exceeded, the life insurance contract will lose its tax free loan and withdrawal status. Furthermore, money taken prior to age 59 1/2 will be subject to IRS penalty.

When buying life insurance to supplement retirement plans, make sure that you stay below the MEC premiums. It is easy to design a program that stays under MEC premiums. Your insurance agent, or the insurance company, will guide you in this area.

In some instances it makes sense to exceed MEC premiums. Some clients may want to put a substantial amount of money into a UL or VUL today and pay no premiums in the future. If the client is confident they will not need to withdraw money from the policy and the policy will be kept until death, an overfunded (MEC) life insurance contract may be acceptable.

More Definitions

Re-entry Premiums
Preferred Underwriting
Universal Life and Universal Variable Life (more detail)
Graded Premium Whole Life
Problems with Underfunding a Universal Life Contract
Net Interest/Net Rate of Return