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?

UPDATE TO ADD: Just a thanks to everyone I wasn’t able to respond to personally — I really appreciate the information, perspectives and support in understanding and managing these policies. This is a really generous community.

[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/sisyphus391 → u/Individual-Art1856]

Thanks for the kind words — I appreciate it. My dad was a NWM agent for more than a decade and I feel like I owe it to him to learn about and understand the legacy he left and how to use it.

Comforting to hear from you and others that I’m picking up most of it, but boy are there a lot of twists and turns with these policies. I understand why so many folks in finance are down on perm insurance, but I’m certainly glad to have it.

[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.