Some people feel that the stock market is too risky and some feel the market is too high. Many people, especially those closer to retirement, are holding onto a lot of cash and not sure what to do. The vehicles that provide safety of principal and liquidity aren’t paying much interest. At least they are comforted to know that their nest egg is safe from a volatile stock market.

If you want to be very conservative with your money and still have a chance to make very good returns, we are really excited about 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. 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).
While Life insurance contracts and MECs have similarity that they both grow tax deferred and have tax free death benefits. The main difference is; life insurance allows you to take money out tax free in some ways. In a modified endowment contract you pay income tax on the gains when you take them out. However, unlike life insurance, our custom designed Modified endowment contracts don’t have any up-front load fees or back-end surrender charges, resulting in 100% liquidity.

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 after the 1st year, some contracts will give you back 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.

Now, 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 in cash or short term bonds waiting for interest rates to go up. You don’t need to make relatively no interest any longer, 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 if you withdraw any money. At least the MEC grows tax deferred. It’s a good alternative to annuities because while they both grow tax deferred, but for whatever profits you don’t use before you die, in a MEC goes tax free to your heirs.

We see how the MEC is superior to both bank accounts and annuities from a tax standpoint.

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 benefits?’

There are numerous benefits.

1) You can make very good interest. In fact, they give you interest that’s linked to the S&P 500 index, and in the UP years you get the gains capped at 11.5%. If the S&P is up 10% you get 10%, if index is up 15% that year, you’ll get 11.5%.

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 do 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 11.5% 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 8.8%. If you look at the last 15-20 years, it’s all been around 7.5% a year. Very stable and very predictable. To stress it again, a negative 20% or 30% doesn’t affect you, it doesn’t make you lose, you just won’t make money that year.

2) 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 there’s no taxes, all the gains are tax free!

3) There’s a large death benefit, so if you put in $100k. And you’re 65 years old and die the next day there’s $200k or more for your heir’s tax free. That’s a pretty amazing perk!

4) 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 actually access your death benefit while you’re alive and take advance payment of the DEATH BENEFIT, up to 24% a year for 4 years to pay for your long term care.’ In most cases this payout is tax-free and 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 1.5-2% a year. So if you made 7.5% and you paid 1.5% in fees, you net 6%. That’s a very nice return. Even if the expected 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 insurance companies did away with surrender charges? They’re not scared about people taking out their money. 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 pay taxes when you don’t have to? Are you going to cash out of your MEC, give up your death benefit and also give up the long term care benefit when you have much better places to take money from? Of course not! The company realizes that. They don’t need to scare people away and make them commit for the rest of their lives to this contract. They allow you to leave whenever you want. They don’t think that you’re going to leave so quickly. They think you’re going to stay here a long time, and therefore they can plan for having this money to invest for a long time. They can even pay the contract holders more interest. They don’t need to twist your arm to get you to promise that you won’t take the money out. If you want to take it out, It’s fine with them.

For a free consultation to determine if a modified endowment contract is for you, or for more information please contact Moshe Fishman at Tekeno Financial at 732-806-0017 or Email [email protected]