- quote -

A Life policy can become a MEC, even when you are
making REGULAR premium payments.
The designation MEC, is used when the Cash Value Acct.,
surpasses the limits set for that policy, for that year, by IRS....
Cal Lester CLU

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oprah.chopra[at]gmail.com wrote:
- quote -


Well hang on...is the sole reason for getting life insurance the estate
tax? You do realize the estate tax scheme in the US is very much in flux
at the moment, yes? And that even in a rollback to the old levels you
aren't anywhere close to the level of paying it? Perhaps state taxes
depending on your choice of heirs and home state, but not federal estate
taxes.

Ask the agent what assumptions he's making about a) your net worth
trajectory b) the future estate tax scheme and c) your marital, family,
charitable, and gifting plans when selling this policy. I can't imagine
how he's framing a case for a 31 year old who is well below the level
where the estate tax is even a consideration.

Sure, you're building wealth, but given that you are very early in the
process of accumulating it, minimizing estate tax is an odd goal.
Unless you know that you are coming into a pot of money that you believe
is certain to exceed the level where your estate would be taxed - is
that the case?

And even then...estate planning - factoring in the estate tax issues -
begins with your will, any trusts, etc. If you haven't addressed that
you're putting the cart before the horse. Insurance agents aren't estate
planners, attorneys are...most people address that piece, and then see
if life insurance fits into the estate plan. Yes, "if".

-Tad

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On Apr 23, 10:48*am, oprah.cho...[at]gmail.com wrote:
- quote -

I You have quite a unique situation. What you need is financial
planning that might or might not eventually involve estate
preservation life insurance. $450k net worth plus 100k annual increase
[at]6% growth for 29 years (to age 60) gives you an estate of almost
$10,000,000, At first glance I would say you definitely need estate
preservtation life insurance. But not the one being recommended.

MEC is short for modified endowment contract. Simply put, MECs are
life insurance policies that are overfunded to the point that the IRS
no longer considers them insurance, but rather an investment. As such,
the death benefit is still income tax free, but the cash value loses
its tax advantages.

My main concern is that the nature of MEC policies is to build-up
large cash values, which IS NOT what you need. You already stated that
estate tax liquidity and preservation are the primary purposes of the
coverage. Utilizing the cash value is contrary to those goals, so why
pay for something you don't intend to use. You need death benefit, not
cash. Besides, insurance is pretty low on the list of cash building
vehicles.

If you need insurance, and I believe you do, then guaranteed universal
life insurance should suffice. Guaranteed UL is permanent insurance,
but builds almost no cash value. It's essentially the cheapest method
available to secure permanent insurance. The only drawback is that if
you ever decide to surrender the insurance you won't get much for it
(but surrendering is also contrary to your stated goals).

Term won't do because the statistics heavily favor you will outlive
its coverage period and leave your heirs with a huge estate tax bill
(which they may or may not have the liquidity to cover). Term's main
purpose is to cover liabilities and dependents that are expected to
disappear over time. This is not the case for you.

One alternative to the guaranteed UL: get a short term policy now
(like level 10 year term) just to "lock-in" your presumably good
health. If in the next 10 years, your future financial forecasts have
not changed, you can convert it to guaranteed universal life. If it
turns out your estate will not be so huge, at least you didn't spend a
lot on insurance. The drawback is that converting is done at your age
when converted, so you may end up paying slightly more in the long
run.

- quote -

Insurance is one of the best ways to avoid estate taxes, but the best
method is through estate planning. Properly designed Trusts can
protect many generations of your family from creditors, estate taxes,
greedy ex-spouses, etc, etc... and will pay for themselves many times
over.

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oprah.chopra[at]gmail.com writes:

- quote -

A MEC is what happens if you put "too much" into a life insurance
policy up front rather than making payments year by year. The
death benefit is still income-tax free, but if you take distributions
during your lifetime, they may be hit with an extra penalty if
you are below 59-1/2.

- quote -

It's often a good idea to avoid estate taxes, but it's
nowhere near as simple a question to answer as "is it a
good idea to use life insurance to do so".

The death benefit from life insurance is usually income-tax free.

The proceeds may or may not be part of your estate and, thus,
may or may not be subject to estate taxes - generally the
issue of avoiding estate taxes on life insurance death
benefits depends on who is the *owner* and who is the
*beneficiary* of the policy.

The trick is to make sure that the owner and beneficiaries
of that life insurance policy are neither you nor your
estate - *that* is how you keep estate taxes off that
death benefit. And it can be achieved in a variety of
ways, but little of that is particularly life-insurance
dependent - generally it requires you to make *gifts*
each year while you are alive. Those gifts could be
anything from cash given to your kids (who may or may
not choose to pay for a life insurance policy on you),
or it may be given to a trust (where a trustee must
still have the discretion as to whether or not to pay
for life insurance premiums). Or the kids could just
take the cash and piss or away or invest it on their
own. All of that gets cash out of your estate. What
that cash is used for (and the value of what's done
with that cash by the time you die) can be anything.

That all said, a common means of managing this is to
set up an irrevocable trust which then owns and is the
beneficiary of a life insurance policy on you. You
must not be the trustee. The insurance policy held
by that trust may be anything from term to a VUL.
Permanent life insurance (like Whole or a VUL) may
grow in value inside that trust, Term would not, but
may be the most cost-efficient if all you want to do
is make sure that there's a chunk of cash to take
care of your dependents.

It sounds, though, like you're trying to avoid taxes
just for the sake of avoiding taxes, rather than
figuring out what you want the money *for*.

Note that if you use an ILIT, you *cannot* extract
and spend any of the accumulated value of whatever
life insurance is in the trust. Your trustee may
do so for the sake of the beneficiaries - but it's
out of your hands.

And if you don't use an ILIT but rather retain ownership
of the policy, while you may extract money from the
policy later (loans or distributions), the benefit
*is* part of your estate.

Note that while there are reasonable and sensible
uses for life insurance, particularly for folks of
somewhat higher net worth who do have reason to set
up the trusts and crank cash into the policies, at
the moment, your estate is not big enough to warrant
that, you haven't said anything about dependents or
children or other planned beneficiaries (or a spouse),
and you need to bear in mind that the life insurance
salesman has a *huge* incentive to sell you a policy
regardless of how much sense it really makes for you.
It might make sense. But for the vast majority of
folks out there (certainly not all!) - a cheap term
policy is probably adequate. So you should be wary.

Note that there's nothing whatsoever wrong with
building up some substantial savings which is NOT
in tax-favored accounts - sure, max out the 401k,
Roth, SEP, etc. But you can and almost certainly
should crank some cash into a regular taxable account,
perhaps in fairly tax-efficient investments (low
turnover funds, etc).

BTW, congratulations. That net worth and level of
savings at you age is astoundingly good. Keep it up,
but don't forget to spend a little and enjoy yourself,
too.

--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
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I am 31, net work around 450k and projected to grow at 100k/ year.
A life insurance agent is trying hard to rope me into a plan where I
can contribute large amounts to a relatively small policy ( ~1-1.5
million ). He mentioned something about MEC, where you can not
contribute too much to abuse the system.

Is it a good idea to use life insurance as a way to avoid estate
taxes? I have already maxed out 401k, roth IRA, and traditional IRA.
I plan to open a SEP IRA next.

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