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New 7702 Law! BIG Change For Cash Value Life Insurance & MEC Limits | IBC Global, Inc - YouTube
Channel: Insurance Business Concepts (IBC) Global
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Alright,
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we are going to go through the new tax law around cash value life insurance
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and what we can expect as a change in the industry
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and really how it will impact whole life insurance policies
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that are designed for maximum cash value.
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What's the difference?
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Thats what we want to know.
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What ill add, the date we are shooting this video,
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January 2021, we do not have any information from insurance carriers
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and how they are responding to this change.
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We've got some rumors, but nothing in writing at this point and time
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frankly this is a big change and it is going to take them some time to
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1) reprice there products, rewrite their products
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but then also (2) test them and make sure that everything is set up properly.
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So its going to take some time before we see
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products actually offered that comply with this new change.
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So the big question, what is going to change?
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The 1st thing is the MEC limit.
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The same death benefit on a life insurance policy
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will obtain me a greater MEC space
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than it does today based off of the current laws,
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with this new law.
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We're going to go through this with an example here in a second.
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Some other changes we can expect,
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product pricing.
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If I'm buying a policy for a pure death benefit
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that death benefit will likely carry a higher base premium.
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They'll be a bit more expensive if I'm purchasing policies
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again for pure death benefit.
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If cash accumulation, maximizing cash value is my goal
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we wont see much of a difference,
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but we're going to get into that in more detail as well.
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The guaranteed rate,
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we may or may not see changes here.
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Again we're hearing different things from insurance companies.
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How this change, section 7702
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impacts the industry,
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it has to do with the reserve requirements that companies must have.
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So how that impacts the actual whole life insurance product,
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where I have a guaranteed rate of 4%
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can definitely be impacted.
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But, rather than state "Guaranteed rates are definitely going to be lower,
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definitely going to be the same."
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Because different companies are stating different things
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in our experience from talking to them, we may see a change.
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Lets get back to the MEC [Modified Endowment Contract] limit
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and the fun part.
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So same death benefit obtains me a higher MEC limit
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So as an example, if I have a 50 year old male,
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based off of the current MEC laws a $2,000,000 death benefit
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obtains you almost a clean $100,000 MEC limit,
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its almost exact.
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So with this new update what's going to happen is
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if I take our a policy with the same $2.000,000 death benefit
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I may see a MEC limit of call it $160,0000,
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could be higher or lower than that.
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Point being, $2,000,000 today obtains me
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$100,000 in MEC space.
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Thats how much I have the ability to pay into a policy on any given year.
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Whereas $2,000,000 tomorrow, when this new rule actually takes effect
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and Insurance companies offer products,
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based on the new tax code, I may have $160,000 of MEC space.
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So I can pay more money into a cash value life insurance policy.
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Ill get into exactly how that is relevant
as well.
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What may not be impacted here, Policy design.
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So insurance companies have premium and PUA limits.
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We talk about this frequently,
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my money can go towards the base premium or the PUA component.
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And really if I Drive more funds towards the Paid up additions rider
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that puts me in a better position where I see more cash value from start to finish.
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How do I maximize the cash value of a life insurance policy?
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Thats it, that PUA rider.
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So, with the product design,
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companies have an apatite call it,
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of how much money they're willing to accept in PUA's
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above and beyond their base premium.
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So with the new tax change, will that impact the policy design at all?
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Its possible but just right now from talking to them
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those limits could just very well stay the same.
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So how is this going to come into play?
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Where it helps.
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All companies have death benefit limitations,
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meaning if I Make $100,000 per year
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and I'm 30 years old,
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I may qualify for 30x my income in life insurance.
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So if I earn $100,000
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I can qualify for 30x my income
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thats $3,000,000 in total life insurance.
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If I'm 50 the income multiplier might be 20x
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or 25x depends on the insurance carrier.
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Point being here, here is where it can help is
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If I'm a 50 year old male
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and I am approved for a maximum death benefit of $2,000,000
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I now have a higher cap (I should state)
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Higher MEC limit.
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Going back to this example
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today for a 50 year old male
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If I qualify for a maximum death benefit of $2,000,000
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that means I have the ability to pay up to $100,000 per year.
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I can easily commit to $10,000
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but my cap would be $100,000.
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Whereas the new change
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I have the ability to pay more.
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So now with the new MEC law if the company says
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"Ok, the maximum death benefit you can still be approved for
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will be $2,000,000 Mr.50 year old male."
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Well then, I can now pay up do $160,000 per year into a policy.
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So if I'm an individual that
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I have a lot of cash on hand
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whether its from a real estate sale, and inheritance
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whatever it might be,
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but I'm capped out as far as the total death benefit that I can obtain
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this is where the law can particularly help me
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I can open up the window room, give me more MEC space
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so now I can funnel more money into a cash value life insurance policy.
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Now of course, I'm very interested, as always
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to see what the guaranteed values look like and such
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this way we can measure the pros and cons.
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In my mind there's always give and take
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with any type of relationship when we look at changes in the tax law.
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The same thing happened when the new mortality update came
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earlier 2020, January of 2020 and had to go into force,
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When that mortality update occurred, the same death benefit obtained you
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less MEC space than what the prior mortality tables did.
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So we had to make a pivot there,
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yet the guaranteed values were a bit stronger.
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So thats the kind of stuff we want to look at
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as we see more information come about.
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Now Lets look at an example here of a 50 year old male to give some visuals,
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to put it into perspective more.
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So we've got a 50 year old male.
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Based off of the current laws,
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to kind of match up with what we were just talking about,
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here we see a $2,000,000 death benefit,
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which gives him a $100,000 MEC limit.
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$100,000 per year for 5 years
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breaking even between years 3 and 4.
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Now, if he wanted the ability to pay in $160,000 per year,
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based on todays MEC law
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we'd have to raise that death benefit.
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Because again,
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what has a direct relationship to my MEC limit with the policy?
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Age and total death benefit.
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So to be able to pay in $160,000 today
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I need to have a $3,200,000 death benefit.
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Which a may or may not qualify for based off of the company's income multiplier.
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Whereas with the new rule thats coming out
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if $2,000,000 obtains me $160,000 in MEC space,
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what we've seen thus far is it might obtain 60% more MEC space
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then what it does today, the new Tax law.
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What I would see is a similar death benefit to this
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but then comparable cash values to this,
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because I have the ability to pay in more,
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If that makes sense.
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I know this can be a little difficult to follow
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because this is conceptual here.
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What we also ran
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with a different company is this,
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so here you see a policy on the left with
a $100,000 MEC limit
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and a 10/90 split.
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$100,000 going in per year,
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there's my cash value,
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death benefit, just about $2,000,000
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which gives him what?
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A $100,000 MEC limit.
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Thats exactly what we did.
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Here is a policy,
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identical death benefit
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but we directed $160,000 per year into the policy.
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Which MEC'ed out?
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This is a Modified endowment contract,
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the purpose of showing this is based off of the new laws
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this is a 10/90 split and has a $16,000 base premium
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because the Insurance company limitation may or may not change
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as far as how far as how low they allow us to go with the base premium.
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Maybe lower, perhaps a portion of that base premium
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comes back to cash value.
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There's been talk as far as restructuring the compensation as well.
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Again this is all information that is speculation right now,
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not concrete.
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But point being, what we might see is something like this
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that is no longer a MEC,
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same death benefit, but comparable cash values.
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And this is based off of the company's present dividend rate
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or non-guarantee's.
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Not the guarantees, thats the big thing,
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again I know I mentioned this already,
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But the guarantees is what I am most interested in seeing.
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The additional MEC space per death benefit
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per the same about or face about
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will help.
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We worked with individuals that had a large lump sum of money
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maybe they received it via an inheritance,
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they wanted to pay it into a policy,
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but they were capped out
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based on the total amount of life insurance they can obtain
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which only got them so much MEC space
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and they couldn't get the money in.
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A recent example is someone wanted the ability
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to pay in $75,000 per year
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however the maximum amount of life insurance he could obtain
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was a little over $300,000.
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This was an older individual.
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And the MEC Limit it obtained him
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was right around $35,000.
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So he's got a big pile of money, he says
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"I want the ability to pay in $75,000 per
year
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thats how much I want to pay in for the next 5 years."
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But the insurance company said, no.
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The maximum death benefit in all circumstances, that he could receive
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is $300,000, which fives him a $35,000 MEC limit.
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So where this new law can help is
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if he is still capped out at that same $300,000 death benefit
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but now has a $70,000 or $75,000 MEC limit,
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he's got the ability to pay more money in.
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So thats the potential advantage there.
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So I know that this is a lot of information
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and it is speculation at this point and time
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because we dont have concrete information.
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But I promise that as it becomes available
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we will be making it public.
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Hope this helps, reach out with any questions.
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Hey guys Steve Parisi here.
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If you enjoyed the content you just saw
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