So the MEC test is what?
The 1st 7 years
of a life insurance policy
important to be aware of that
however is it possible
that you can run into
a modified endowment contract
a MEC after the 1st 7 years?
The answer is yes
and it's very important to provide
full transparency on this topic
because people have gotten
into trouble with this
now it's easy to prevent and reverse
but there's not much
transparency on this.
So with a life insurance policy
the terminology
the life insurance industry uses is this guy
material change
this can occur with a life insurance policy
and the outcome can often be a MEC
a modified endowment contract.
So what is a material change
with a life insurance policy?
Well it is an adjustment
to the total benefits of a policy
specifically referring to the death benefit.
With a life insurance policy
we have the initial
what was it?
That MEC limit
7-Pay premium test
1st 7 years of a life insurance policy.
Now does it stop
after the 1st 7 years?
Because I've spoken with
a number of professionals
that thought it had
that after the 1st 7 years
you're beyond the MEC test
you're good.
I used to think that
when I first got into the industry
it doesn't work like that
I wish that it did.
The MEC limit
will typically reset every 7 years
now I say typically reset every 7 years
if a material change occurs
on a life insurance policy
that will make the policy subject
to a new 7-Pay test
a new 7 years
where the MEC limit resets.
In past videos
years ago I'd always say
with a MEC test
you've got the initial 7-Pay test
7 years
what happens something like this
this is usually the pattern it follows
where every 7 years
it gradually decreases.
Now you can prevent that as well
depending on the company
and the design
but it will often gradually decrease
if you're constantly pumping money into it
is the big thing.
So material change
what triggers that?
So the MEC limit can reset every 7 years
or your policy can be subject
to a new 7-Pay test
if there's a material change
or change to benefit to the policy.
Well what are some examples
of a material change?
That's what would be my follow-up question.
Face amount increase
if I make any changes to the death benefit
so if I like to go through underwriting
and add a term Rider
or pump my death benefit up
that'll be classified as a material change.
If I pump money into PUAs
often people do this for what?
To continuously grow the cash value
however PUA stands for paid-up additions
when I make a payment there
those dollars will purchase me
paid-up additional life insurance
additional death benefit
which is classified as a material change
this is often where people run into
modified endowment contracts
down the road
when they continue to pump money into PUAs
and the policy was not MEC tested
based on conservative dividends
and a guaranteed rate
that's when it happens
which is easy to prevent
but that's typically what we see
or we've seen I should say.
Term Rider reduction
and or removal
so if I have a term Rider
we see this a lot with level term Riders
that fall off after a certain period of time
if I have a term Rider
that's a level 7-year
level 10-year
level 20-year term Rider
when that term Rider falls off
there's going to be a material change
and the death benefit will drop
the MEC limit will drop
and I will be forced
to pay a lesser amount of money
into that life insurance policy
once that term Rider falls off.
With 1-year term Riders
that's not the case
unless I'm manually reducing it
or if it burns out altogether
company selection is important in that case
and I can get very technical there
we've got other content on that.
Here's just a bullet point I want to mention
we can prevent a long-term MEC
so I'm specifically referring to this guy
if you have a policy
where you say I want to be able to
pay as much money into this policy
for as long as possible
that is my specific goal here
and I don't want to run into a MEC
we want to prevent
a long-term MEC in this case
how you do that
or how your agent does that
is MEC test the policy
mainly by looking at the guarantees.
What I like to do in these particular cases
if someone says hey
I want to have a policy
where I just shove money into it
I want a 10/90 split
I want to break even between years 3 and 5
and I want to pay into it for 40 years
until I'm 70 years old
or something like that
what I'll do because this is important
is test the policy
based on the present dividend rate
then also a conservative dividend rate
I'll often cut it in half
and then also just the guarantees
because where people have run into
MEC issues
specifically with high cash value
life insurance products
is when the current illustration
said the policy would not MEC
and it MEC down the road
it was a result of dividends coming down
and that death benefit did not grow
at the fast pace that it originally projected
on that original illustration
the death benefit
has a direct relationship
to the MEC limit.
I know that's technical
but it's it's easy to prevent
as long as you forecast it.
So let's continue on here
some good stuff
we're going to touch on next
the MEC limit
very important subject here.
So on that MEC limit
you can set it wherever you want
on the illustrations we touched on earlier
it has a direct relationship
to an individual's age
and total death benefit.
So MEC limit
again you can set it
if I want the ability to pay in
$100,000 per year
I'm going to design the policy
to have a $100,000 MEC limit.
If I want a policy
with a $5,000,000 MEC limit
I'm gonna set the policy up
to have a $5,000,000 MEC limit
or I'm sorry if I want the ability
to pay in $5,000,000 per year
I'm gonna have a $5,000,000 MEC limit
it's a big number
so how do I set that MEC limit?
Age, total death benefit
emphasizing the word total
because the term insurance Rider
and even PUAs will impact that initially
gender
and then also the guaranteed rate.
Since the new 7702 change
where all life insurance companies
typically have different guaranteed rates
or can have different guaranteed rates
this now becomes
a topic to be more aware of
with respect to MEC testing
and again if you're a consumer
and you're looking at this
you're thinking oh my goodness
don't worry
your agent knows all this stuff
if you're working with us
we know all this stuff.
But here we go
how this piece works
because in the past
I'd always say that the MEC limit
has a direct relationship
to an individual's age
and total death benefit
which it does
but then also I've got this to be aware of
if you have an old policy
with a guaranteed rate of 4%
and you're a 40-year-old male
you would need
or would have needed
because you can't get these policies anymore
a total death benefit of $2,800,000
at a minimum
to obtain a $100,000 MEC limit
so an individual's age
and death benefit
the product of a guaranteed rate of 4%
$2,800,000
gives me a $100,000 MEC limit.
If I have a product
with a 3% guaranteed rate
now that same 40-year-old male
needs a total death benefit
of just over $2,000,000
to obtain the same $100,000 MEC limit
the lesser the guaranteed rates
the less life insurance I need
to be able to pay in
the same amount of money.
Fun stuff, right?
A guaranteed rate of 2%
I need a death benefit
it's actually a little bit less than this
$1,450,000
to obtain that same $100,000 MEC limit.
If you have a guaranteed rate of 2.5%
then I'm going to need
just about $1,700,000
to get that same $100,000 MEC limit
and how you can tell
is the examples we looked at
with the $100,000 per year
this example we referenced earlier
has guess what?
A $100,000 MEC limit
and a 2.5% guaranteed rate
so there's your total death benefit
just over $1,700,000
in this particular example
but that can always be run with any company
and any illustration
fairly easy to project upfront.
So we are just about at the finish line here
with respect to setting the MEC limits
the last thing I want to touch on here
and this will kind of close this video out
and this discussion
is if you're thinking okay
like this stuff is good
from an informational standpoint
but how do I make sure
I'm getting the best possible deal
if my goal is maximum cash value?
So if you said
I want a whole life insurance policy
I want maximum cash value
from start to finish
I want to make sure a MEC never occurs
like with all of this said
how do I set a policy up appropriately
where I've got maximum cash value
and no chances of a MEC occurring?
So one of my favorite things to discuss
if you've seen any of our videos
you know this policy design
where is your money going?
We've got a line added to this one MEC
so at the end of the day
your money can go toward 2 primary areas
the base premium
or your PUA Rider
notice we'll have a term insurance Rider
we have a term insurance Rider in this one too
so premium dollars
what happens here
any premium dollars you pay in
let's say you pay in
let's do this a little bit differently
$10,000
what will that give you in cash value
in the 1st year?
Typically nothing
that'll buy you a death benefit
of let's say $500,000
okay shrink this down a bit
cool board, right?
I do like this
mainly because I've got
very very bad handwriting
and this improves it
or makes it smaller
which makes it appear to be improved.
But here's what I want to mention here
that $10,000 base premium
that was our base
gave us no cash value in the 1st year
sometimes the 1st and 2nd
eventually that comes back
to cash value for you
but right here
that $500,000 death benefit
may obtain you a MEC limit
call it of $25,000
so what that means
is you can pay in a maximum
of $25,000 per year
with a $10,000 base premium.
Now what a lot of corporations do
is they want rich cash value
right off the bat
minimum premium
and getting as much money
into PUAs as possible
and have a non-MEC
they want the best of all worlds
and it is possible because
insurance companies want
corporations business
because they're large deposits
large premium deposits.
But the thing is
individuals can have the same thing
so what we can do here
is we can add a term Rider
it's going to call it a $1,000 in this example
that does not build any cash value
it'll be less than a $1,000
but that will give me
let's call it another $1,500,000
at $1,500,000 which may get me another
$75,000 in MEC space
so what this allows me to do
is raise the death benefit
which mainly raises the MEC limit
in the cheapest
if you don't like the word cheap
the most cost-effective manner
so I can keep my premium low
people don't like that
because it doesn't build any cash value
in the 1st year
this allows me to keep the premium
as low as possible
boost my MEC limit
up to the amount I need or want
and then I can do something like this
and that makes me happy
I've got more money in cash value.
Paid-up additions
will buy me some death benefit as well
which will push my MEC limit up a little bit
sometimes well every time we'll consider that
in the overall policy design
but what this allows me to do
is set my MEC limit wherever I want
so in this particular case
when we add those 2 together
what do we have?
$100,000 MEC limit
$10,000 minimum base premium
assuming the insurance company
will allow me to 10X
my minimum base premium
which the example we had up on the screen
this was actually with MassMutual
their maximum allowable limits
that they will allow you
to pay into a policy per year
is 10X the base premium
if you try to submit a policy for issue
with a greater limitation than that
or a greater PUA payment than that
they'll reject it
that is the maximum
the software makes you aware of that as well
but 10 times is the maximum limit.
So what I want to be aware of
is what is the insurance company limitations
and also the IRS limitations
in an effort to maximize my cash value.
Very easy to understand, isn't it?
So overall I hope that this video
was helpful
just with respect to
the modified endowment contract
bullet points to be aware of
the MEC limit how that works
how we can set it wherever we want
how to stress test the policy
by looking at a conservative dividend rate
also the guarantees.
One thing I mentioned this in the beginning
if you ever do trigger a MEC
no need to worry
no need to panic
what happens is the day after it occurs
the next business day
the insurance company
will notify your agent
they will notify you
and if it happened by accident
if you don't want a MEC
typically all that is needed
is an email from you to the agent
which your agent can then forward
to the insurance company saying hey
I don't want the MEC
can we please reverse it
and they will refund you the difference
or if it was a transaction
where I removed the term Rider
or something by accident online
because you can do that
with some companies
through an online portal
they'll refund
or they'll reverse the transaction
as long as it is done within 30 days
typically you're in the clear
and we're notified the next day
so that gives us plenty of time
in that respect.
So I hope you enjoyed this one
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If you have any questions
or would like to leave comments
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reach out to us anytime
and thank you so much
as always I hope this helps.
Enjoy.
Hey guys Steve Parisi here
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