MEC Limit on HECV Illustration

[efranco86]

I'm working with an agent and interested in HECV policies. The sample policy he generated for me has a $11,380 base premium and $300 addt'l for the waiver (see attached for a redacted copy, 31 yo, select preferred non-tobacco, $1 MM guaranteed death benefit, premiums stop at age 85)

The policy also shows a MEC Limit of $29,500 in the bottom right hand corner. It's unclear to me what that means and wanted to get some clarification from the gurus on this forum as I don't really understand the explanation provided.

Does that mean I can directly provide $17,800 in additional premium each year to purchase paid up additions? Or directly provide at most $29,500 in additional premiums in every 7 year window?

Also, are paid up additions riders available on HECV policies?

 

[DHK]

MEC = Modified Endowment Contract. Essentially, to preserve the tax benefits, the Federal Government put a limit on how much you can put into a life insurance contract and retain the tax-free (tax-preferred) tax status. Contributions above this limit make the contract a "MEC" and the gains are withdrawn first - fully taxable.

It's been a long time since I sold a high early cash value policy as they are primarily designed for the business market to make capital transfers from other accounts to life insurance with as little expense for insurance as possible. This makes it far more favorable for balance sheet/accounting purposes.


My question for you is this: Why aren't you talking to your MassMutual agent about your questions? That's what he's paid to do, if he's going to be selling you this contract.

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Modified Endowment Contract (MEC)

 

[scagnt83]

The MEC Limit shown is the total Premiums per year that you can pay without going over the yearly limit. The 7-year test is based on that Yearly Premium.

That includes both Base Premium and any Riders.

There is a Rider to purchase Paid Up Additions available on the HECV Mass product. It is called the LISR Rider.

You can contribute an extra $17,800 per year without going over the MEC Limit on that policy. If your goal was to "max out" a WL policy, that is not what you asked for. You need to add LISR and fund it with the $17,800 difference. What is shown is not "overfunded" at all, meaning no attempt to maximize the Cash Value.

 

[jboussea]

The MEC Limit shown is the total Premiums per year that you can pay without going over the yearly limit. The 7-year test is based on that Yearly Premium.

That includes both Base Premium and any Riders.

There is a Rider to purchase Paid Up Additions available on the HECV Mass product. It is called the LISR Rider.

You can contribute an extra $17,800 per year without going over the MEC Limit on that policy. If your goal was to "max out" a WL policy, that is not what you asked for. You need to add LISR and fund it with the $17,800 difference. What is shown is not "overfunded" at all, meaning no attempt to maximize the Cash Value.

Are there any scenarios where someone would use an HECV plan if the goal is not to maximize cash value>

 

[efranco86]

Thanks for the responses! I know about the 7-pay test and what a MEC is, I just don't know what the MEC-limit value listed in the sample policy represents. Logically I thought it would be the 7-pay value....i.e. the yearly maximum average premium that could be contributed in the first 7 year period before the policy would become a MEC.

I'm trying to maximize the early cash value, I need the optionality as I occasionally have very short-term high-return investment opportunities.

I am talking to an agent, he's a MassMutual agent but sits in the office of the multi-insurance broker I use for commercial and personal liability and property policies, but I'm really not sure he's telling me the right thing, which is why I came here, to get a second opinion....trust...but verify.

I specifically told him I am looking for plans maximizing high cash values early on and that screenshot is on the tabular values of what he came back with.

I then asked if there was a paid up additions rider/enricher rider so I could directly purchase paid up additions and he kept saying the paid up additions were purchased with dividends. I am aware that dividends can be directed towards paid up additions, but...that's not what I asked him.

I again asked again in these HECV policies besides the dividend option towards paid up additions are there any rider(s) available to allow us to directly purchase paid up additions, and he seemed to understand this time as his response is there is an ALIR rider, which I think is the correct answer.

I then asked him if I added $17,800 in premiums each year to purchase paid up additions it looks like I get around $5 of death benefit per dollar to start, dropping each year of course, but at that maximization after 20 years I would have directly purchased about $1.4 MM-$1.5 MM in additional death benefit plus the guaranteed $1.0 MM base death benefit plus something like $500-$700k in dividend-funded paid up additions, and his response was that "The MEC limit of $29,500 is not a yearly limit, it’s a 7-year limit. If you exceed $29,500 in additional deposits in 7 years, you have a MEC.

On the illustration, paid-up additions kick in in year 3. The dividends paid are responsible for the purchase of the additions. These additions in year 3 ($16,900), for example , generate approximately 20% in additional cash values and so on. This % reduces over time."

His response was like a weird regression to the universe where ALIR doesn't exist and also his MEC limit response didn't make sense me, and so I decided to query this forum. Course if I started with this whole story...it's a lot easier for people on forums to answer with yes or no rather than a more detailed answer..lots of us naturally take the path of least resistance.. so I decided to post the question first to get some unfiltered answers.

His answer on the MEC limit doesn't make any sense at all to me, sorry, if I'm a little slow on this point. Isn't the MEC limit is what the 7-pay equivalency would be? If $29,500 were the total additional deposit limit in the first seven years, then $29,500 in additional deposit could cover the entire policy meaning $16k a year for the first 7 years would be the equivalent 7-pay...no way that is the equivalent 7-pay. I can back into a rough equivalent 7-pay based on the paid up additions that are in the table, in the first 7 years $1 in premium buys ~$4.8 in death benefit so a 7-pay for a 1 million death benefit in this scenario would require about $208k in the first seven years which is $29,714 per year, right around the $29,500 limit listed in the policy.

scagnt83 I've seen some of your other overfunded WL policy posts so I know I'm now talking with someone who is knowledgeable! My [limited] understanding from the research I had done was that the ALIR was MassMutual's paid up additions/enricher rider. But the ALIR paid up additions are... paid up so the MEC limit isn't affected (i.e. there's no headroom because the added death benefit is paid up). The LISR I hadn't heard of until your post, I want to make sure I understand what it is, the LISR is a combo of term insurance bolted on to the policy plus the maximum amount of paid up additions corresponding to that term insurance added in (since the term policy must increase the MEC limit)?

So if I understand, I can add $17,800 extra per year without going over the MEC limit using ALIR, and then use LISR to bump up the MEC limit (via the term piece of the LISR) while adding more paid up additions corresponding to the bump (i.e. utilizing the bump)?

 

[aclaro]

To comply with MEC limits there are two tests for WL policies: the guideline premium test and the cash value accumulation test. You have to pass both tests.

There are cases where you can not fund up to the 7 pay premium due to the cash accumulation in later years of the policy. It really becomes important to understand and prioritize the purpose of the policy.

These purposes will also help determine which type of policy is best (HECV?) and how to fund it properly.

 

[scagnt83]

Are there any scenarios where someone would use an HECV plan if the goal is not to maximize cash value>

Possibly, but not usually. Perhaps in certain business succession scenarios they might want a higher DB vs. a higher CV. But it would really just depend on the situation. It would be for accounting reasons so that the Premiums would still show as an asset of the business. But Ive found that this is not a huge concern in most situations. Most business owners have a "whatever" kind of attitude towards that unless they need to show lots of assets for a loan or valuation.

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To comply with MEC limits there are two tests for WL policies: the guideline premium test and the cash value accumulation test. You have to pass both tests.

There are cases where you can not fund up to the 7 Pay premium due to the cash accumulation in later years of the policy. It really becomes important to understand and prioritize the purpose of the policy.

These purposes will also help determine which type of policy is best (HECV?) and how to fund it properly.

This is incorrect in multiple ways.

1. GPT and CVAT do not determine if a policy is a MEC. A seperate test called the 7-Pay Test determines if its a MEC or not. GPT & CVAT determine if the policy is classified as a Life Insurance Policy. If a policy failed GPT or CVAT, gains inside the policy would be taxable on a yearly basis, just like a normal non IRA investment account.


2. Only 1 testing option (gpt or cvat) can be used. Both GPT and CVAT cannot be used together on the same policy. The policy must choose which test option to use.

3. Whole Life ONLY uses CVAT. The GPT test is not available on WL policies, only on UL policies.

 

[aclaro]

scagnt...I love it when you keep me on my toes.

Yes you're are right. You can't interchange MEC with DOLI (definition of life insurance). That being said the 7 pay premium is to for MEC testing in WL and the CVAT is to comply with DOLI.

So to rephrase...my point is that there are times when you can not max out the 7 pay premium due to violation of the CVAT later on in the policy.

 

[Justin Bilyj]

HECV runs out of steam later on in the policy with regards to dividends, high cash early, low cash later on. I couldn't cite the actual mechanism, just remember what was told to me when asked about these early on..

 

[efranco86]

Sorry about the delayed response. As a new member only my new threads get posted immediately, my first few replies had to be approved by the mods. But see above for the details on my issue. I'm reasonably certain based on what was said here that I need another agent, if the agent doesn't know the MEC limit how is he going to design a policy that snuggles that limit... Now how to extricate myself from the current agent and go to a new one...I emailed the sales manager and basically said I needed a specialist who has issued HECV policies that are funded near the MEC limit.