A recent survey shows that despite difficult economic times, many middle-class policyholders have insisted on holding onto their life insurance coverage. According to the First Command Financial Behaviors Index, who released the August survey, only four percent of Americans surveyed reported making changes to their personal life insurance policies as a result of the economy. And of those who did make changes, 42 percent actually increased their coverage.
These numbers show a sharp contrast to reports that life insurance is suffering and sales are dropping. According to the CEO of First Command Financial Behaviors Index, he believes that maintaining life insurance helps many policyowners actually feel better about their financial futures, which is why they hold on to their policies. They know that they can take care of their families after they're gone, or maybe even cash out part of their policy while they're alive depending on the type they obtain.
But while the survey showed some surprising numbers, this doesn't mean that everyone is going along for the ride. There are still 68 million adult Americans with no life insurance coverage, according to LIMRA International. And many of those who are insured have far less coverage than they should.
Organizations like LIFE Foundation - who asked First Command to create the survey for Life Insurance Awareness Month (LIAM) in September - are working to increase awareness of the need for life insurance coverage, as well as ways to obtain it and how to make smart decisions after purchasing a policy.
Since the recession started, have you been able to maintain your life insurance coverage?
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Modified Endowment Contracts: Chapter 2 of 5
Now that you understand more of the basics of an MEC, we should review some key points about them.
MEC 101
- Based on professional financial advice, some policyholders follow a unique strategy of overpaying their total premium payments to exceed amounts specified under the Internal Revenue Code.
- When that happens, the policy then automatically evolves into a Modified Endowment Contract (MEC).
- When your policy becomes a MEC by IRS standards, the death benefit payout will still qualify for income tax-free treatment.
- What makes a MEC differ from a traditional permanent life insurance policy is that if a policyholder takes any distributions from their policy over their life time, that money may have additional taxes and penalties levied onto it as it will now be taxed on a "income-first" basis.
Modified Endowment Contract Yields
However, while the money from a MEC stays in the account, taxes do not need to be paid. With a MEC, investors are provided a tax-free way to accumulate wealth. Compared to other investment opportunities, ultimately a MEC can generate a larger yield for the investment because of the tax-deferred status of the product.
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Permanent Life Insurance Basics
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