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What is a MEC and When To Avoid It | Tier 1 Capital - YouTube
Channel: Tier 1 Capital
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have you ever heard of a modified
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endowment contract or a mech
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well stick around to the end of the
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video because today we're going to do a
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deep dive into the nitty gritty on mech
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contracts hi i'm olivia kirk and i'm tim
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urich we're from tier one capital and
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we're here to show you how to regain
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control of your money for the best
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advice on controlling your cash flow
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please be sure to subscribe to our
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channel and don't forget to hit that
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bell to be notified when we upload new
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videos
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basically a modified endowment contract
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or a mec is a life insurance policy that
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gets stripped of its tax advantages
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because it doesn't pass the seven pay
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test the seven pay test is a test used
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by the irs to determine whether or not
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your policy will become a modified
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endowment and the seven pay test is
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really simple it compares the amount of
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premium needed
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for you to pay up the policy in the
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first seven years
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and if the premium you actually put into
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the policy exceeds that
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then your policy is determined to be a
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modified endowment contract once a mac
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always a mech if you put one penny more
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than is allowed by that seven pay test
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your policy will always be a mech and it
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will always be stripped of its tax
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advantages so what are the tax
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implications of having a modified
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endowment contract or a mac basically
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once the policy goes from being a life
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insurance contract and crosses that
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imaginary mech line it goes from being a
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life insurance contract to being treated
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as a non-qualified annuity
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and as any non-qualified investment a
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mec
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any distribution taken from a mec will
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be considered ordinary interest or
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return of the interest earned
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and that goes for any distribution
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whether it's a dividend distribution
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or a policy loan which generally aren't
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taxable but if your policy is a mec
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the distribution can be taxable
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additionally just like a non-qualified
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annuity any distributions or policy
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loans or surrenders prior to age 59 and
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a half
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are subject to that 10 penalty despite
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losing some of the tax advantages of
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life insurance when you have a mec there
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are some situations where it makes sense
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to go for the mac particularly if you
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don't plan on accessing the cash value
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prior to age 59 and a half or a lot of
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times it makes sense if you have assets
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that you need to shelter from the
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expected family contribution fafsa
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calculation so when wouldn't you want
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your contract to be a modified endowment
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contract you wouldn't want your policy
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to be a modified endowment contract if
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your plan is to access the living
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benefits of the policy whether it's to
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make major capital purchases
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educate your children or supplement your
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retirement if you have enough time to do
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the planning and you plan on accessing
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the living benefits of a life insurance
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policy you would want to avoid a mec at
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all costs and it's easy with the way we
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design the life insurance contracts for
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cash accumulation to avoid that mech but
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sometimes people have a large lump sum
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of money that they want to put in
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immediately and we have to split that up
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over several years so that the policy
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doesn't become a mech and we could take
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advantage of the tax advantages and the
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tax shelter offered by a life insurance
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policy but one of the things that i
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found is
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the mech issue is much to do about
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really not a lot and the key is this
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number one
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the mech status could be avoided with
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proper planning and design and that's
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where we can help you and secondly keep
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this in mind whether your policy is a
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mec or it's not a mec
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you still enjoy the tax-free death
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benefits that are given to life
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insurance policies and because of that
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it still creates a nice little tax
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advantage
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if you'd like help designing a life
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insurance policy for cash accumulation
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or a modified endowment contract be sure
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to visit our website at
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tieronecapital.com to schedule your free
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strategy session today
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also if you like this video please be
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sure to give us a thumbs up and don't
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forget to subscribe
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thanks so much for watching our video
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and remember it's not how much money you
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make it's how much money you keep that
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really matters
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[Music]
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