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Modified Endowment Contracts: Chapter 4 of 5
What basically starts off as a typical permanent life insurance policy that provides both investment opportunities for the policyholder and a death benefit to heirs becomes more complicated as investors choose to over-contribute to theircumulative premium payments. Once it exceeds a limit set out by the Internal Revenue Code, it evolves into a MEC.
MEC Costs
It is important to note that MECs cannot be purchased directly but most go through this process. Therefore there are no direct costs associated with the transaction except for the funding of the investment to convert it. Each policy is different, so only by speaking with an investment professional and a life insurance specialist can you determine the exact limits and amounts to be paid by this end.
Indirect Costs
However, if you exceed the limits set by the IRS for MEC contribution, there will certainly be costs involved in the form of losing the tax free status of the investment. Additional costs associated with MEC are 10% penalties for withdrawals before the age of 59 1/2 years old, as well as taxes and penalties levied on any distribution withdrawn from the policy over its investment terms.
