Alright,
so in this video
we are going to take a look
at some MEC [Modified Endowment Contract] treatment
and we're going to focus on the topic of
catch-up contributions.
It's an interesting topic
and it is great knowledge to have
if I own a whole life insurance policy
or if you are considering one
or from an agent.
Because it really allows me to make up for lost time.
You're gonna see that's exactly what it allows one to do.
I can continue to enhance an existing policy.
A lot of times people see this and say:
"Hey, I didn't know I could do that."
This is a great tip or great piece of knowledge to have.
This way I can continue to maximize an existing life insurance policy.
Especially if I have more money
and not have
to start all over with a new policy
and go through the early expenses again.
Everyone's situation is different of course.
But let's take a look here.
When it comes to the MEC limit, it is a cumulative number.
Really what that means is any unused MEC space will roll over year to year.
Kind of like those old cell phone plans with the rollover minutes.
Remember how those worked?
Where I could bank on any unused minutes
and they would carry over to the next month
and then I could use them?
Similar, only with the unused MEC space
on a life insurance policy
you will find that unused MEC space is cumulative.
Continues to compound on itself.
What that allows one to do is make big catch-up payments down the road
if their situation permits.
We're going to demonstrate that here as well.
So when it comes to the policy design
we always talk about, when I set up a policy,
where can my money go?
I can allocate it toward the premium or the PUA [Paid-Up Additions] rider.
Now, when I actually craft that policy
when I design it,
the items I have to be aware of
as an agent and a policy holder
are the limits.
Two primary limits I want to be aware of:
one is the insurance company limits.
Specifically what I mean when I say that
is if I want to pay in $50,000
or any amount of money per year,
my money can go toward base premium or PUAs.
Wherever I set my base premium
how much will the specific insurance company
I am considering allow me to add into PUAs per year.
What I will add is
all companies have slightly different rules and regulations there.
The companies that we prefer, the larger guys,
have all right around a 10x limitation.
Some are 11x but it's right around that 10x limit.
The example we're going to look at here, the spreadsheet, has a 10x limitation.
Specifically what that means is
if I have a $5,000 base premium
the insurance company
will allow me to pay a maximum amount of $50,000 per year.
10x my base premium payment.
The first limit: insurance company
Second limit IRS
MEC limit, that's important here.
We want to make sure that our life insurance policy
does not become classified as a MEC.
Now because it is a cumulative number, I can bank on unused MEC space
as time passes as we mentioned earlier.
To demonstrate,
if I have a policy with a $50,000 MEC limit
and a $5,000 base premium.
Now I can commit to a loan number, the base,
and have the ability to go up to $50,000.
Let's say I do something like this...
I pay in $25,000 in the first year,
we're going to assume the first 4 years.
What that means is I could have paid in $50,000
but I only paid in $25,000.
That means the additional $25,000 in unused MEC space,
we're going to call that, will continue to
compound year over year.
Meaning year 2, I can make up for lost time and make that payment.
As time passes I can continue to make up for lost time.
For example, by the time I hit year 4 I have the ability
to throw in an additional $100,000 in unused MEC space.
That was money I could have paid in during the first 4 years
but I did not.
The insurance company will permit me to make a large lump sum
PUA catch up payment, to make up for lost time.
As a quick side note,
the policy does have to be constructed properly
for the company to actually take those payments
without going through medical underwriting.
That's a whole other conversation but that is very important.
Second, they will allow us to exceed that 10x limitation.
When it comes to catch-up payments,
we've never had a problem with that.
For example,
here, when I first start a policy $5,000 base premium
ability to go up to $50,000.
Okay, great!
In year 5, let's say I sell a piece of property
and I want to plow $150,000 total into the policy.
Max out the MEC limit that year and make up for lost space,
I can do it.
The company will accept it
provided I don't MEC it out and the policy is constructed
properly where underwriting is not required.
$150,000 obviously exceeds 10x the base premium there.
Because I'm making up for lost time and I could
have gotten same dollar amount in
if I paid in $50,000 each year,
we can make those payments.
We've done this several times with several individuals that have had policies
Let's demonstrate this actually.
What we're going to look at is a policy on a 40 year old male
paying in $50,000 per year.
I should say carrying a $5,000 base premium
and $50,000 initial MEC limit.
The example on the left is what the policy looks like
if I max fund it from day one.
$50,000 per year.
Crossover point, I'm positive
by year 5.
Okay, looks great!
Keeps on growing. I have paid a total
of $500,000 dollars into the policy
on that example.
The reason why we are showing this example is
whenever I look at catch-up payments
or any payment frequency
where I bounce payments up and down,
what's the impact?
Time value of money.
How much do I give up?
What's the difference in cash values?
We have it side by side so we can see it
but that's why I put them side by side.
Now this guy over here with catch-up contributions.
Exact same policy,
$5,000 base premium,
$20,000 PUA.
I've got a term rider attached to both of them.
Annual outlay: $25,000 per year.
The breakeven point is just about year 6.
Here's really what I want to focus on though,
Let's put this in green,
Years one through four we paid in $25,000.
The MEC limit was $50,000 in this example.
Just like that example we had on the whiteboard,
the unused MEC space is rolling over year to year.
That is how I make a large catch-up payment.
A total of $150,000 into the policy in year 5
Here's another way to break it down.
I have a MEC limit of $50,000 per year,
b/y year 5, what's the total amount I could get into the policy?
$50,000 x 5 years is $250,000.
How much have I gotten into the policy in this example?
$100,000 over the first four years and then $150,000 in year 5,
$250,000.
Over in this example, by year 5, how much have I gotten into the policy?
$250,000.
The exact same dollar amount in, the only difference is
in this example I max funded it each year
whereas this guy
I 50% funded it
and then made a large lump sum catch up payment.
What's the difference in net cash value though?
Because this guy, as I get money into the policy,
I see compounding right off the bat.
On everything!
Whereas this guy,
not quite.
I've received compounding
but what I've paid in by year 5,
I've got $238,000,
over here $252,000.
I do see a difference. Right?
Because I've gotten more money into this policy faster.
Now time passes,
year 10
you make another large catch-up payment
of a $100,000.
We repeated the same pattern
but you'll notice this is not $150,000.
The reason why
really has to do with the MEC treatment.
Without getting into too much detail here
after the seventh year,
if you've seen any of our other content on MEC laws
you may have heard me say this before,
after the seventh year typically
what happens with a MEC limit on any life insurance policy?
Resets.
It's based off of our age
and death benefit from that point forward.
Whatever it is when I start a policy,
it is set in stone for the first 7 years.
Unless I decrease the death benefit, that can adjust it.
For the most part it's set in stone
and then at year 8 it will reset.
Again its based off of my age and death benefit.
It did decrease in this example.
We could not make another payment of $150,000.
We did not want to MEC it out in the example
so we paid in $100,000.
But I wanted to make sure we paid in the same dollar amount.
In this example to this example.
We made two more payments of $25,000.
Point being here,
year 12,
paid in a total of $500,000.
I have $604,000.
Over here, by year 12,
I paid in $500,000
but got it in, in 10 years instead of 12.
By the 12th year, I've got $637,000.
There is a difference in this example
and as time passes you'll see
this guy continuously have more in cash value.
That's really just time value of money.
I've got more money into the policy faster.
It's compounding right away.
It puts me a little bit further ahead.
With that said, having the ability,
or I should say the awareness to do this
gives me a nice edge.
Let's say I build a policy out
where I want the ability to pay in $50,000 per year
but again I don't want to commit to it.
I might have some windfalls down the road.
Say It's $150,000
$100,000.
Then we could stretch this out longer as well.
What's the worst year of any life insurance policy?
Early years.
What's the best year?
Every year after the 1st and 2nd year.
Point being is if I can make large lump sum PUA payments
to an existing policy that is already over the initial insurance expenses,
if I anticipate being able to add more money into a policy or
windfalls and I deliberately build up more MEC space
to accomplish that, good to know.
As opposed to just max funding a policy
and then when I come into more money, opening a new one.
Again, it's always good to weigh out the options there.
We like to do that kind of stuff.
However,
if I can bank on some MEC rollover space,
it doesn't hurt me.
I know this one was a little bit deeper than most.
I hope it was helpful.
We'll talk to you soon.
Hey guys! Steve Parisi here.
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