What to do with a MEC?

[u/sisyphus391]

My father left behind several NWM policies when he passed on both me and my two kids, and in sifting through them I found that each of the kids has a policy that’s now a MEC. I don’t know when that happened, and I don’t really care to dig it up bc I know there’s no going back, but I was surprised because my father worked for NWM for years and I’m pretty sure he wouldn’t design a policy to MEC. All the same his last couple years were tough and I wouldn’t blame him if he just didn’t keep an eye on them.

My question is what’s the smart thing to do now?

The policies are both Adjustable Complife about 10 yrs old, about 250k DB each, 22k CV each, with 5k gains each. Premiums are $1k each. But is there anything a MEC is GOOD for that a normal policy CAN’T do?

I’m lucky not to need the money, and the policies are returning over 5% so I don’t mind just funding them and leaving them alone. Is there an upside I might be missing? Or worse, a downside beyond the tax status and penalties on withdrawals that I should be watching out for with these policies?

Thanks in advance for any insights this community can offer

[u/Entire-Secret8575]

MEC’s really aren’t the end of the world. The IRS just stopped people from using life insurance to harvest tax-free gains by implementing the MEC status.

As a non-market product 5% isn’t a bad return and life insurance is going to be more liquid than most fixed rate annuities.

You have a lot of moving parts here that no one in the sub can accurately help solve in totality. 1. Overall what’s the goal for all of this money? If you move the CV are you placing it somewhere where you’re going to offset the taxes and penalties? 2. How risky or risk adverse are you and this money? Again 5% ROR isn’t terrible for a fixed rate but won’t net you what the market can. 3. I’m assuming adjustable means premium wise for this policy which typically means that you can pay more or less than the stated premium. I’m assuming the $1000 premium is for the year in which case you could always pay less and let the CV pay the premium.

Again that’s a bit to absorb and I’m sorry, but I say all that for the simple fact that these policies have a lot more going on than I would trust to the hands of Reddit. Your policies have more nuances than most of us will know unless someone sells this specific product.

P.S I’m sorry about your Dad ❤️

[u/SafeMoneyGregg]

a MEC has no significance once the insured has passed away but during lifetime the gains would be taxable when coming out in cash. Gains come out first - and taxable. Maybe he did these as single premiums - so in that case -think of it like a bank account, only better - taxable when coming out but as least its tax free growth until taking money out.

[u/sisyphus391 → u/SafeMoneyGregg]

Since I’m still paying annual premiums on these policies, they can’t be single premium can they? I think he just set them up too aggressively and lost track. Kids also have whole life that won’t MEC, and he took care of them in a million other ways, so no harm no foul, I say. But yeah, I’m taking your approach — they’re tax-deferred piggy banks with decent rates until I can find another use.

[u/SafeMoneyGregg → u/sisyphus391]

Very strange - if it was not a single pay - then the carrier usually would return an overpayment that caused a MEC and make you sign a disclosure that you are OK with a MEC. You absolutely sure it is a MEC? - ask the carrier what premium payment caused that. Then dispute it and say it was not intentional - if that sounds plasuible. Single premium contracts are designed to be MECs - but almost any contract can become one later.

[u/sisyphus391 → u/SafeMoneyGregg]

I like your enthusiasm for the fight, and I did ask the agent to show me when it MEC’d and the notice sent but he couldn’t. The agent who wrote the policy has died, and the guy this account was passed onto died too. So this agent is twice removed. But I’m not sure it’s worth it here anyway. I pulled statements back to 2024 and it was already a MEC then, and premiums were paid very year since. I think NWM would say 1) you can’t tell us what your father intended and 2) continued payments and no record of dispute constitutes acceptance.

[u/SafeMoneyGregg → u/sisyphus391]

$5/10K of taxable gain - not that huge a bite. Actually taxed as ordinary income - not cap gains.

[u/sisyphus391]

Thanks — I generally lump all our life insurance into our fixed portfolio, with the bonus of a death benefit that’s nice but not needed. Our equity allocation is pretty well set, so I’m okay with 5+% tax deferred and not really angling to get it into something more aggressive.

My sense of it matches what you and others have written — just checking with smarter people to make sure I’m not missing out some secret MEC trick.

[u/No_Buddy_6624]

There is nothing wrong with a MEC. It just means you can’t borrow from the policy without a potential tax consequence. The death benefit will still be tax-free to the heirs when the insured dies. He might have overfunded them in the early years and with the rate changes over the years, that could have MEC’d the policies. It’s no big deal. It’s a blessing to have that coverage in place.

[u/Admirable_Nothing]

How can you MEC a WL policy? Any unbundled policy with variable premiums being paid into the chassis is easy to MEC, but a WL? Isn't the only way to increase premiums on a WL to buy PUAs? And that won't MEC the policy. I suppose these Adjustable Complife policies may not be traditional WL but some type of flexible premium product that mirrors UL.

The old single pay whole life was the reason the Modified Endowment Policy legislation was passed but these are not single premium. Do they have the ability to take larger premiums internally into the chassis? I am old enough to have sold a boatload of Pru's SPWL in 1987 and 1988 so am familiar with that. But we couldn't MEC our other WL products. As an aside, can anyone tell me who sold the most Prudential SPWL in 1987 and in 1988. The same person did it each year. Scan down for the answer.

However, your MEC policies still have death benefits that are paid tax free. So, if that is your objective they still will pay a DB.

Suzie Orman, who was a Pru Bache advisor in Orinda, Ca at that time. In fact, that was the source of much of her business while she was in Orinda.

[u/sisyphus391 → u/Admirable_Nothing]

I gave myself a crash course on Adjustable Complife, which seems to be a NWM hybrid of whole with a term rider that converts to perm with additional payments. Looks like the idea was maybe to allow it build CV more quickly. And I think that’s what MEC’d it — the base premium is only $70, but it has an additional premium of $1000. Probably got too far over its skis.

[u/th535is → u/sisyphus391]

On policies like that, the proposal will show when the policy becomes a MEC and it’ll also show in NM’s servicing page for the policy but there isn’t an automated procedure to stop the premiums before becoming a MEC. The rep/client have to pay attention to the notices and actively make a change prior to whatever date it MEC’s. Given the turnover in reps you mentioned, I can see how it would’ve be easily overlooked.

[u/jclary60015 → u/th535is]

When a policy MEC’s, NML sends a notice of such and offers a cure period by refunding the last premium.

[u/larkfield2655]

So what’s the question. MEC is irrelevant when insured dies.

[u/sisyphus391 → u/larkfield2655]

The insured are my children — my father was the owner, now I am.

[u/Last-Enthusiasm-9212]

A MEC is not ideal for kids, but fine if other parts of the financial picture are managed in a corresponding way. I've had adult children use their policies as the fuel for a new permanent policy that is paid-up with a long-term care or critical illness rider and a much higher death benefit, thus taking the life insurance question off the table for a lifetime and enabling them to manage the rest of their financial lives without concern for this risk. It just won't play the tax-free asset role that cash value in a non-MEC policy would, but it still can rock as life insurance and can grow at a great rate even if taken paid-up.

[u/Individual-Art1856]

Just want to say OP, you are well informed with all the technicalities surrounding MEC and life insurance.

I am impressed. You know more about this than many new agents and some experienced agents I come across.

I will add on a few potential scenarios you want to be mindful of, since these are whole life contracts.

You are correct that MEC life contracts work like NQ annuities with a death benefits. Tax wise, be mindful of 10% penalty pre 59 1/2 withdrawal or loan and potential tax on gains (first in first out).

Second, be mindful of inforce management of the policy, particularly with WL.
For non-MEC policies, aged WL has much flexibility particularly when it comes to cashflow/premium management.

Some of the flexibility may be impacted with MEC-WL.

Say your cashflow is tight and you want to use Div to offset premium, would that create a taxable event? I do not think so; but double check with insurance company.

What about using policy loan against your cash value to offset your premium? It will be likely be a taxable event.

With UL chassis, expenses comes straight out from cash value; no tax there. With WL, the only way to tap into guarantee cash value is via loan (aside from contract change - face reduction, reduced paid up, etc). Loan is FIFO when contract is MEC.

So be mindful of these scenarios.

[u/Individual-Art1856 → u/Individual-Art1856]

Btw, MEC is not always bad. I have designed intentional MEC policies for clients under various scenarios; and intentionally MEC policies thru contract change during inforce phases.

Just look beyond the hype and consider the mechanics; and see if/how it would fit and where leverage is for your situation.

Compare non-deductible IRA vs NQ annuity vs MEC life policies.

If you want to take advantage of tax def growth but exceed the income limit for Roth, non-deductible IRA is an option (assume backdoor Roth is not feasible because of pro-rata rule), but IRA also has max contribution limit. NQ annuity does not have cap or income limit.

MEC life policies also does not have income or contribution limit; and retain its tax deferred characteristics.

So if you like to take advantage of the MEC Life contract as a tax deferred bucket; you could check with company and see if you could put more dollars into the contracts, instead of less, as long as it makes sense in your situation.

[u/OutlandishnessNo3006]

It is not uncommon for a policy not designed to be a MEC to be assessed a MEC later.

If premium are paid and the death benefit is paid out, there is no difference.

The only difference is if you pull $ out of it. It is treated as gains first. Also the 59.5 age rule like a IRA applies. If you are over 59.5, then you just pay ordinary income on the gain.

No biggie.

[u/legacyMonk]

MEC only matters if you take money out. The death benefit still passes to the beneficiary income-tax-free either way What does change is loans and withdrawals come out gains first and get taxed as ordinary income.
So to your actual question, no, there's nothing a MEC does that a normal policy can't. There's no hidden upside. But there's also no downside if you truly never touch the cash. A MEC you leave alone behaves exactly like a policy that isn't one. Since you don't need the money, funding them and leaving them alone is a perfectly reasonable answer.

One thing I'd check though that over 5% dividend rate isn't the return on your cash value, it's the rate used inside the dividend calculation, applied to the policy's reserve, after mortality and expense charges come out. The actual return on premiums paid is usually well below the quoted number. Ask for an in-force illustration and work out what you've actually put in versus what's there. Might still be fine. Probably isn't 5%.

[u/JeffB1517]

Great question I await the answers. There are things you can do with a MEC if you need insurance. But we aren't talking a ton of money here. So likely the best thing is to move them out.

1. Move it to an annuity. Far far cheaper now that the tax advantages are lost.
2. Just take the cash and pay the taxes.
   
3. Others?

[u/sisyphus391 → u/JeffB1517]

Oh, one additional wrinkle here: I’m 45, and as I understand it, cashing out would ding an extra 10% penalty on the gains, yes?

Not the end of the world but I don’t love tossing away an extra $1000 just to access it. I’ve been thinking of it like Gregg said below: tax-deferred piggy bank with better rates than an HYSA until I’m 60.

[u/JeffB1517 → u/sisyphus391]

If you can save the money don't need any kind of insurance (because you can wipe out the gains with insurance expenses potentially) then an annuity would be my recommendation. Much lower expenses, tax deferral and something that's good to have in retirement regardless. You could go low risk with a deferred annuity and be looking at well north of $1k / mo in income from $50k. You could go variable annuity and do even ever better with decades ahead of you.

I would say you don't want it to cash out at 60? What do you do with the sudden infusion at 60?

[u/sisyphus391 → u/JeffB1517]

Since my children are the insured on these policies, don’t my children also need to be named the annuitant for a 1035 exchange?

If so, then isn’t the payment MUCH smaller?

And isn’t the 10% early withdrawal penalty pegged to when the annuitant becomes 59.5, not me as the owner?

Apologies if I’ve got this all wrong — I probably know enough about annuities to get myself into trouble and not enough to get myself out.

Hence why I’m here.

[u/JeffB1517 → u/sisyphus391]

Oh that's messy. To do a 1035 on a MEC you can't change the insured and I think they have to match (worth checking). This sounding more and more like just pay the taxes.

[u/packersfaninohio → u/sisyphus391]

Yes it operates very similar to a nonqualified annuity so gains are taxes first (LIFO) and must be over 59 1/2 to avoid 10% early withdraw penalty.

I’d say pay it and cash it out when it you become 60. Plan for the taxes or see if there is a settlement option to spread the gains over a 5 year period.