[COMMUNICATED] Some people feel that the stock market is too risky. Many people are holding onto a lot of cash and not sure what to do. The vehicles that provide safety of principal and liquidity are earning very little in today’s low-interest-rate environment.
Moshe Fishman of Tekeno Financial is constantly looking for what else there is besides stock market based investments. If you want to be very conservative with your money and still have a chance to make very good returns, we are really excited to show you some of the Modified Endowment Contracts that are available.
For those of you not familiar with what Modified Endowment Contracts are, they’ve been around since 1985 and are guaranteed from top rated life insurance companies. It’s what happens when you put too much money into a life insurance contract. It is no longer life insurance and is now called a Modified Endowment Contract (MEC).
Life insurance contracts and MECs are similar that they grow tax deferred and have tax free death benefits. However, far superior to life insurance, some Modified Endowment Contracts don’t have any up-front load fees or back-end surrender charges, resulting in your money staying 100% liquid.
So why haven’t you heard about MECs if they’ve been around since 1985?
Until a couple of years ago, MECs typically had large surrender charges like most life insurance policies. Which means that if you put $100k into a life insurance contract or a MEC and you want your money back, some contracts would give you back $50,000, and some up to $80,000. Neither the MEC or life insurance was a vehicle for liquidity purposes, it was more of a vehicle for long term wealth transfer, as they always had this large tax free death benefit. In recent years, some companies have come up with MECs that don’t have any up-front load fees or back-end surrender charges.
You know what else doesn’t have an up-front load or back end surrender charge? The bank accounts you have, and the money market account you have. The Modified endowment contract that some of you have, and some of you might have in the future, has neither a surrender charge or an up-front load fee. Which means it’s liquid, you can get all your money back whenever you want.
This can be an excellent substitute for your bonds. Especially if you’re sitting on cash or short term bonds waiting for interest rates to go up. You don’t need to make relatively no interest. You can actually make decent rates of interest. The fact that there’s no up-front load or back end surrender charge is a complete game changer. This opens up this asset class to a lot of different investors.
It’s a good alternative to the banks that you have your money in, because there you have to pay taxes on the gains each year regardless of whether or not you withdraw any money. At least the MEC grows tax deferred.
Now your obvious question is, ‘I get that it’s liquid, but what am I going to make? What am I going to earn by putting my money in a Modified Endowment Contract? And are there any other advantages?’
There are numerous benefits.
1) Excellent Interest-You can make very good interest. In fact, they give you interest that reflects the S&P 500 index, and in the UP years you get the index gains capped at 10.5%. If the S&P 500 index is up 10% you’ll get 10%. if index is up 15% that year, you’ll get 10.5%.
What happens in the down years? You don’t lose, your floor is 0%. In fact, if the market goes down a lot like in 2008, not only don’t you lose, but that becomes your new low starting point for purposes of calculating the performance for the next year. So if you start where the index is 2000 and it goes down to 1500 in year 1, and then comes back up to 2000 in year 2, you made really good interest the second year. If you actually owned the index you would have broken even.
You’re going to find there’s some sequences of returns where this will perform much better than the actual index. This is because when you wipe out negatives, this can do better than the actual index. Now if every year for the next ten years, the market is up 15%, then instead of making 15%, you would have made 10.5% each year. As you know, that probably won’t happen, we probably won’t get up years every year.
What is it the expected average return for this formula? In the last 5 years this formula has averaged 7.5%. If you look at the last 15-20 years, it’s been around 7% a year. Very stable and very predictable. To stress it again, a negative 20% or 30% doesn’t make you lose, you just won’t make money that year.
2) Tax Treatment-Obviously the tax treatment as we mentioned earlier. It grows tax deferred and you don’t have to pay taxes unless you take money out. If you die before you take out your money there are no taxes, all the gains are tax free!
3) Large Life Insurance Benefit– There’s a large death benefit, so if you put in $100k and you’re 60 years old and die the next day there’s $200k or more for your heir’s tax free. The younger the insured person is, the larger the life insurance benefit is. That’s a pretty amazing perk!
4) Long Term Care Benefit– What happens to some people before they die, they get sick. They can’t do 2 of 6 activities of daily living or they get a permanent cognitive impairment. The insurance company says, ‘If that happens to you, you can access a portion of your death benefit while you’re alive and take advance payment of the life insurance benefit.’ In most cases this payout is tax-free. Additionally, this payout does not need to be spent specifically on long term care expenses. If you turned out not needing long term care, your heirs are still getting all that extra money income tax free.
Now let’s average in the fee that the insurance company is going to charge, because they are providing you with a death benefit and long term care benefit. Depending on your age and health, it’s going to be about 1-2% a year. So if you made 7% and you paid 1.5% in fees, you net 5.5%. That’s a very nice return. Even if the expected net return is 5%, which would be low based on historical numbers, you would still be quite pleased for your no risk investment.
If you could make 5% at the bank, you’d have a line out the door. If you can make 3% at the bank, you’ll have a line out the door. If I can get you a one-year CD for 3%. You’ll have a line out the door! That’s how good this is.
It occurred to me why it is that some of our companies recently starting offering contracts without surrender charges. They aren’t afraid about people taking out their money. While you can if you want to, let’s think about it. You have money in a Modified Endowment Contract, money still in the bank, money in your IRAs, and money in the stock market. If you need money and you’re looking at your different assets. Are you going to take money out of the MEC and give up all the benefits? Of course not! The company realizes this. Therefore, they don’t need to scare you away by making you commit to this contract for the rest of your life. You can take your money out whenever you’d like.
Let us design a MEC for your safe money today! Call 732-806-0017 or Get in Touch with us here.