A modified what? It’s called a Modified Endowment Contract (MEC) and was a creation of the terrible twins TAMRA (Technical And Miscellaneous Revenue Act of 1988) and DEFRA (Deficit Reduction Act of 1984).
It’s important you understand why the MEC was created, who created it, and how it can effect your money. IRS Code, Title 26, Subtitle F, Chapter 79, Section 7720 is the description. If you’re bored feel free to read it. Here’s the point. The very fact they, the government, made the effort to craft and pass this type of restriction and limitation on what you could do with your money, keep in mind, it wasn’t like this prior to 1988, tells us one thing: it must be good in regards to taxation.
You see, prior to 1988 you could put virtually an unlimited amount of money into cash value life insurance and get all the benefits. What benefits? Here’s a list:
- money grows tax deferred,
- can be used tax free,
- has a competitve rate-of-return (remember no fees and no tax),
- has guarantees,
- returns a tax-free dividend based upon company performance,
- the money is credit proof,
- you could contribute an unlimited amount of money,
- you were unlimited in your investment options because you had
- liquidity, use and control of the money,
- it could be used as collateral,
- it was estate tax-free, and
- had disability protection – meaning if you became disabled the insurance company would continue to contribute your annual outlay (what 401k will do that one?).
Take a look at this pdf and line up the benefits you have with your money compared to how these policies are designed…click here.
The government didn’t like this; therefore, they decided to “further limit the perceived abuses by preventing policyholders from paying large single premiums to purchase life insurance and borrowing the cash value, tax-free.” Heaven forbid we have some financial tools that they don’t have their hands ALL over. The founding fathers of this country would be up-in-arms. Folks, this type of policy, and the benefits associated with it, had been a LONG standing tool used by virtually all the wealthy families in the country…here’s a great book that describes this very thing, The Pirates of Manhattan. I have no association with this book it’s just a good read. Check this out, this is an article from November of 1999 in the Denver Business Journal. They did a special publication called The Century Book. This publication dedicated one page for every year from 1900 to 1999 and covered something from Denver’s history for each year. For the 1929 page they talked about the Crash and introduced you to Claude Boettcher – “Denver’s most famous investor”. Anyone who has lived in Colorado for any length of time has heard of the Boettcher family. This article mentions how he lost everything but waited for banks and stocks to drop so low that he borrowed $2,000,000 from his cash value life insurance to buy them all up (notice he lost his investments but he didn’t lose his insurance values). I love the line right after the mention of this – “the reason he is still known to history. Most investors had no other resources to call on.” Read it here. The “Infinite Banking Concept” is NOT NEW! It has been around for over a century.
In 1988, the government created a limit. So think about this: who determines the minimum one can pay for a death benefit of, let’s say $500,000? Come on, who determines the minimum you, the consumer, can pay for a death benefit of half a million? The insurance company. They decide what they can charge you and still make a profit. This is called term insurance. You pay the least amount and get one benefit – death benefit. On the other side of the spectrum, who determines the MOST you can pay for that same $500,000 death benefit? Most people say, “I do. I determine the most I’m willing to pay.” Wrong. The government. The very fact that the government limits what you are able to do with your money tells you that it must be good in regards to taxes. You know what, they’re right. Of course they’re right. Taxes are their biggest concern. If they aren’t getting them then you bet your $SS they’ll go out and find them.
It then begs the question as to why whole life insurance policies are still around then, right? Well, you can still get all the above benefits, EVERY one of them, you just have to now capitalize the policy a little slower. Before 1988, you could put, for example, $200,000 as a lump sum into a policy and get all the benefits. Today, you have to spread that out over, typically, a five to seven year period. The argument of “cash value life insurance is too expensive” is plain elementary. Those supposed experts who make that claim are right if someone is using CVLI purely for protection…i.e., focused on one benefit. Buy term and do something with the rest. However, if you want to act and function just like a bank then you’d pay the most amount of money for the smallest death benefit to dance just below the MEC line and get ALL the benefits above on your money. Read that sentence again. Around year five you’d have available every single dollar you put in. This then becomes a pool of money that you can use to replace any financing or lost opportunity for paying cash. It’s exactly what banks do. Take a look at this graph (it’s nothing fancy as I created it, but the data is straight from the FDIC website). I broke down the top five banks and their holdings in cash value life insurance, in the BILLIONS, and more importantly, how they have increased their holdings over the past few years.
JPMorgan Chase is the only one who’s values went down between 2008 and 2009; however, their loan balances went up by almost the exact same amount. They very well likely utilized this powerful tool to borrow from. We’ll know at the end of this year when we see their numbers. Folks, these are the top five banks in the country making double digit percentage increases in their cash value holdings! Why? Because they are masters of liquidity, use and control, and leverage. I ask you, are you?
You can be. It’s my job to teach you.
Kelly O’Connor – firstname.lastname@example.org
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