Why You Need Mec Life Insurance

A Modified Endowment Contract (MEC) is a cash value life insurance policy that has lost its tax benefits because it contains too much cash. MECs originated in the late 1980s after interest rates on cash-value life insurance policies hit 20%. This allowed people to use life insurance as a tax shelter, which led to the creation of MECs and set limits on investments in life insurance policies. MECs are taxed on a gains first basis, meaning that any withdrawals or loans are taxed as ordinary income. This can lead to significant tax liabilities if large amounts of accrued gains are withdrawn. MECs are also subject to early withdrawal penalties, loss of favourable tax treatment for premiums, complexity and monitoring, and inflexibility. Despite these drawbacks, MECs can be useful for estate planning and offer a higher yield on low-risk funds than some alternatives.

Term life insurance vs. whole life insurance

The main difference between term life insurance and whole life insurance is that term life insurance covers you for a set number of years, while whole life insurance usually costs much more but can last your entire life. Whole life insurance can also build cash value that you can borrow against, which makes it a more complex and expensive product.

With either policy, your loved ones can spend the payout however they like, such as funeral expenses, mortgage payments or college tuition. But depending on your coverage needs, one type of life insurance may be a better fit than the other.

Term Life Insurance

Term life insurance provides coverage for a set term or specific amount of time, usually between 10 and 30 years. If the policyholder passes away during that specified period, the beneficiary will receive the payout. Term life insurance usually costs less because there is only a payout if the timing aligns.

You are also able to choose your term based on your unique situation, possibly reducing costs in the long run. This choice is popular for young families because of the lower premiums upfront. It can also be a good choice for seniors factoring in their long-term plans.

Whole Life Insurance

Whole life insurance provides coverage for your entire life cycle. Typically, whole life insurance costs more because it serves as an investment. This investment, otherwise known as the cash value, is able to grow throughout your lifetime tax-free. The premiums will not change throughout the course of your life and the death benefit is certain. The cash value will grow in a tax-deferred account at a secured rate. This is a popular choice for those looking to maximize their financial potential.

Term Life Insurance Pros:

It’s customizable, specific to your timeline, and usually costs less than whole life insurance.

Term Life Insurance Cons:

• If you outlive the term length, your coverage will end and you won’t receive any benefits.
• You will not be covered your entire lifetime and your policy will not accumulate cash value like an investment account does.

Whole Life Insurance Pros:

The premiums will always be the same amount, the payout is guaranteed (subject to limitations and exclusions), and the value of your plan grows at a constant rate.

Whole Life Insurance Cons:

You cannot choose the length of the policy and it’s typically more expensive than term life insurance.

Pros and cons of term life insurance

Term life insurance is a type of policy that offers financial protection for a set period, usually 10 to 30 years. It is often sought by individuals who need coverage during specific times in their lives. For example, parents with young children may choose term life insurance to ensure financial stability for the family if something were to happen to them.

Pros of Term Life Insurance

• Affordability is one of the key advantages of term life insurance. Since it provides coverage for a specific period and lacks the investment component found in permanent life insurance, the premiums of a term life insurance policy are generally lower, making it a more budget-friendly option for many individuals and families.
• More coverage is available. After determining how much life insurance you need, you may be surprised to see that the final figure is $1 million or more. With a term life insurance policy, you can buy $10 million or more in life insurance at an affordable price.
• The death benefit is tax-free. If you die during your policy term, your beneficiary or beneficiaries will receive a lump sum from the life insurance company. Fortunately, term life insurance death benefit proceeds are tax-free, so your beneficiary can keep the total amount to use as they wish.
• Term life insurance offers flexible payment and policy options. You can choose to pay your premiums monthly, quarterly, semi-annually or annually. You can also choose how long you need coverage, whether one year or 30. The most common terms are in increments of five years, from five to 30 years in coverage.
• There is no penalty for canceling. If you decide to cancel your term life insurance policy while it’s active, you can do so without incurring any fees or penalties.

Cons of Term Life Insurance

• Term life insurance only offers temporary coverage, so it’s not always the best option for everyone. If you have permanent life insurance needs, like funeral expenses or caring for a special needs child into adulthood, term life insurance coverage may not be your best choice.
• One of the disadvantages of term life insurance is that it doesn’t build cash value, meaning it doesn’t include a savings account to borrow or withdraw from. If you cancel a term life insurance policy, you don’t get any money back unless you get a policy that offers a return of a premium feature, which comes with higher costs. This differs from permanent life insurance, which provides a surrender value based on the cash savings account if you cancel the policy.
• Term life insurance has a lower age cap than permanent life insurance. Though the maximum age limit varies by company and term length, most people can apply up to age 50 for all term lengths. Term life insurance for 60-year-olds or older may be limited to a 10- or 20-year term without the option for a 30-year term.
• The specific restricted time frame that term life offers may be an issue for some. You can buy a $500,000 30-year term policy if you are in your 30s, but if you wait to buy it when you are 65 years old, you may get a 20-year policy. The term length is highly related to your current age at the time of the application.
• It’s like renting a house or an apartment; there is no cash value to the policy after paying for 20 or 30 years.
• If you should develop some health issues that would keep you from getting new insurance, you will be stuck with the high premiums to pay at the end of the term should you decide to keep it.
• The conversion built into many term plans is only allowing you to convert it with the company where you first bought the term policy. So, if you develop any health history, you are at the mercy of the product and services of the same company. If they don’t have a good permanent product, this is your only choice.

Who needs life insurance?

The decision to buy a life insurance policy is a personal one, and not everyone wants or needs to be covered. However, there are several groups of people whom experts say should strongly consider life insurance.

• Couples: If one passes away, the other should be able to maintain the same quality of life.
• People with young children: Life insurance can protect your family and help them maintain their current lifestyle.
• Homeowners with a mortgage: So that the death benefit can pay off the mortgage.
• Business owners and partners: To provide solvency and protect personal and business interests.
• Those wanting to leave a financial legacy: Life insurance can provide money to beneficiaries, usually tax-free.
• Parents with dependents: The death of a parent can leave children at a severe disadvantage.
• Single parents: The death of a single parent can leave children with a financially uncertain future.
• Those with large debts: Life insurance can be a good way to ensure your beneficiaries can pay off your debts.
• Primary earners of the family: If you die, your loved ones may be unable to support themselves.

Who Doesn't Need Life Insurance?

You may not need life insurance if:

• You are single, financially independent, and have no dependents.
• You have substantial savings for end-of-life expenses.
• Your loved ones can easily support themselves without your income.

Types of Life Insurance

There are two primary types of life insurance: term life insurance and permanent life insurance. Term life insurance covers you for a set number of years, while permanent life insurance covers you for your entire life.

There is no one-size-fits-all solution, but you can estimate the amount of coverage you need by considering your current income, debts, investments, and other financial assets.

When to Get Life Insurance

It's worth evaluating your life insurance needs after major milestones such as getting married, having a baby, switching jobs, or getting a divorce.

How much life insurance do I need?

The amount of life insurance you need depends on your unique situation, obligations, and priorities. The basic concept is simple: life insurance is an agreement between you and an insurance company where you pay premiums, and in return, the company agrees to pay a specific amount (known as a death benefit) to your beneficiaries when you pass away. This amount should be large enough to cover the bills and expenses that your loved ones will need help with in your absence.

• Multiply your income by 10 and add college costs for each child: This approach considers your income and plans for your children's education. However, it doesn't take into account other important factors such as your savings or existing life insurance policies.
• Use the Human Life Value (HLV) method: This method estimates your coverage needs based on the value of your future earnings. It suggests multiplying your income by a variable based on factors like age, occupation, and projected working years. For example, between the ages of 18 and 40, you may want coverage of around 30 times your income, while at age 61-65, it's recommended to have coverage of 10 times your income.
• Use the DIME formula: This formula considers four significant factors: Debt (excluding mortgage), Income, Mortgage, and Education. By adding up these obligations, you get a more comprehensive view of your needs. However, it doesn't take into account your existing savings or life insurance coverage.
• Replace your income and add a cushion: With this method, you calculate the amount by dividing your annual income by a conservative rate of return (e.g., 4-5%). This approach ensures that your beneficiaries can replace your income without spending the payout itself.

While these rules of thumb provide a good starting point, it's important to remember that your situation is unique. Consider seeking advice from a financial professional who can take into account your age, income, family situation, financial obligations, and other factors to help you determine the right amount of coverage for your needs.

How to buy life insurance

Decide if You Need Life Insurance

According to the Insurance Information Institute (III), most people need life insurance. If any of the following are true, it's worth considering:

• Your family or beneficiaries would face financial hardship without your income.
• Your dependents would inherit a large amount of debt if you were to die.
• You want to cover end-of-life expenses, including funeral, burial, or medical costs.
• You want to pay for a dependent's tuition, day care, or retirement costs.

Determine How Much Life Insurance You Need

The amount of life insurance you need depends on various factors, including your personal and household income, the needs of your dependents or prospective beneficiaries, and your financial goals. Here are some questions to ask when determining your policy coverage amount:

• How will the loss of my income affect my dependents?
• How long would I like my income to provide financial support for my beneficiary?
• How much will my dependents or spouse need to cover the mortgage or rent?
• What day-to-day expenses, if any, do I want to cover for my beneficiaries?
• How will my loved ones cover end-of-life expenses, like funeral costs, estate taxes, etc.?
• Do I want my life insurance policy to be used as an inheritance?
• Do I want part of my life insurance policy to go to a charitable organization?

Determine Which Type of Life Insurance Is Right for You

There are two primary types of life insurance to choose from: term life and permanent life. Term life insurance provides coverage for a set period, typically between ten and 30 years, and is more affordable than other options. Permanent life insurance covers you for as long as you live and typically has the added benefit of a cash value component, separate from your death benefit. Here are some features of each:

Term life insurance

• Provides coverage for a limited period, typically ten to 30 years.
• More affordable than other life insurance options.
• Predictable premiums and a guaranteed death benefit.
• May be renewable or convertible.
• Doesn't include a cash value or investment component, and doesn't offer loans or withdrawals.

Permanent life insurance

• Coverage lasts for your entire life.
• More expensive than term life policies.
• Typically has a cash value component, separate from the death benefit, that grows on a tax-deferred basis. You can withdraw or borrow against the available funds.

Whole life insurance

• A form of permanent life insurance offering a guaranteed death benefit and a cash value component in which interest accrues on a tax-deferred basis.
• Policyholders can typically access their cash value funds before death.
• How your cash value grows depends on the type of policy you choose.

Universal life insurance

• Another form of permanent life insurance that allows you to maintain coverage for life.
• Offers the flexibility to adjust premiums and death benefits.
• Includes a cash value component that can fluctuate depending on investment market performance.

Decide if You Need Life Insurance Riders

Riders are additional benefits or options that can be added to your policy for customized coverage. Some common riders include:

• Children's Term Rider: Allows parents to cover their children under the policy.
• Accelerated Death Benefit Rider: Allows you to access your death benefits before you die if you're diagnosed with a terminal illness.
• Accidental Death Benefit Rider: Increases the death benefit if you die from injuries sustained in a covered accident.
• Waiver of Premium Rider: May protect you from paying the required premium if you become disabled due to injury or illness.

Choose a Life Insurance Company

When choosing a life insurance company, you can work with an insurance agent, insurance broker, or directly with an insurance company. Here are some tips for selecting an insurance company, agent, or broker:

• Ensure they are licensed to sell insurance in your state.
• Review company ratings from independent agencies like AM Best Company and Fitch Ratings.
• Get reviews and referrals from friends, family, and trusted financial professionals.
• Shop around and compare insurance companies, policies, and premiums.

Purchase Your Policy

Once you've identified the type and amount of coverage you want and compared companies, it's time to begin the application process. Here are the steps you'll need to take:

• Complete the life insurance application, providing basic contact information and specifying the type of policy you plan to purchase.
• Undergo a medical exam or screening, unless you choose a no-exam life insurance policy.
• Choose your beneficiary or beneficiaries, specifying how much of the coverage amount will go to each individual.

Frequently asked questions