Most people are familiar with term and whole life insurance because those are the two major categories in today’s market. However, did you know that there are numerous sub-categories of policy types within each of those two general areas? There are basically two kinds of term: pure and convertible. Convertible products can be, as the name implies, converted into whole life after you meet certain conditions based on your age, health, and how long you’ve had the coverage. When it comes to whole, or permanent, insurance products, the variations are more numerous. Plus, it’s important to know what a modified endowment contract (MEC) is and how to get an estimate on the total value of your policy. Here’s a short summary of the main kinds of permanent policies you can purchase, following by a brief discussion of MECs:
Four Types of Permanent Life Insurance Coverage
- Adjustable (aka Universal): The insured has the option of changing, or adjusting the amount of the death benefit and the amount of the premiums based on various factors. Some people use these policies to increase coverage or reduce their premiums due to economic circumstances.
- Variable: You’ll be able to do some investing with the amount paid into the policy, which can raise or lower the death benefit and cash value.
- Variable-Universal: As the name implies, you get the features of variable coverage combined with the features of adjustable insurance products. These kinds of contracts can be complex, but many consumers like the idea of the chance to invest wisely and change premiums or death benefits when needed.
- Whole: This is the most popular and best-selling category of permanent insurance. It combines a savings account feature with a death benefit, level premiums, and many tax benefits.
What Is a Modified Endowment Contract?
A MEC, or modified endowment contract, are connected with both whole and universal coverage. Under U.S. tax law, if you pay too much into a life insurance policy too quickly, it loses its tax benefits. In other words, if you take money out of a MEC, the distribution is treated, in most cases, as fully taxable income. So, why would anyone want to have such an arrangement? The answer is a bit complex, but in general, a MEC can be a key component of an estate plan in which the insured wants to pass a large amount of money onto heirs without going through probate and without leaving a taxable payout to loved ones.
Getting an Estimate on the Value of Your Policy
You can get an estimate on the value of your policy at any time by calling an agent. Or just look at your monthly premium statement. Most display the cash value or buy-out amount prominently. If, however, you want to know what you’d get for a life settlement, you’ll have to dig a little deeper because that amount will depend on the market. A life settlement is usually about four times the amount of the cash surrender value. Always discuss pertinent details with a licensed agent, including the reason you might want to sell your policy.
