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Understanding Indexed Modified Endowment Contracts

A Modified Endowment Contract, or MEC, is a life insurance policy. But it’s unique in that when your alive, it can act much like an annuity. An Indexed Modified Endowment Contract (IMEC) is a MEC that tracks a particular stock market index, such as the S&P500. As indexed life insurance products become more mainstream, it is important to understand how these products may work into one’s planning — especially in terms of their potential MEC status.
Given that their accumulation values are tied to an underlying index, these policies can offer both the opportunity for growth, along with a safety of principal feature. This combination has made these policies attractive to many who are approaching retirement and who are seeking a method to both grow and protect assets.

Some Advantages of Including IMECs in Your Retirement Portfolio

While IMECs may not be ideal for everyone, they do present a number of key advantages. First, just as with other types of indexed products, they can track many popular market indexes, including the Dow Jones, the S&P 500, or the NASDAQ. In terms of safety, IMEC holders can have their cash account value locked in each year, essentially protecting principal from future market downturns. IMEC holders can also take advantage of tax-deferred growth – and unlike an IRA, there are no IRS limits on annual contributions to an IMEC.
In addition, because it is built on a life insurance chassis, an IMEC can also offer various “living benefits” such as tax-free access to cash if there is a need for long-term care or home health care. And, as with any life insurance policy, there is the death benefit, which allows income tax-free wealth transfer to heirs.

A Few Considerations To Keep in Mind

Along with the IMEC plusses, there are a few considerations to keep in mind, too, starting with the fact that because it is a life insurance policy, you need to qualify medically. In addition, for investors who are looking for a place to move qualified money, an IMEC isn’t going to be the solution, as these plans won’t accept most qualified dollars such as IRA funds. Similar to an IRA, however, is the 10 percent early withdrawal penalty that can be imposed on an IMEC holder for withdrawing money prior to turning age 59 1/2. For those who are seeking long-term guaranteed income, an IMEC may not be a substitute for an annuity. Although income can be generated from an Indexed Modified Endowment Contract, you won’t get an ongoing, lifetime guarantee like you can from an income annuity contract.

The Bottom Line on IMECs

Indexed Modified Endowment Contracts can provide a way to balance both growth and safety of principal, while at the same time offering additional features such as tax-free cash for health care needs. When considering an IMEC, though, it is important to keep in mind that there are many different ways that these products can be structured, and they are definitely not a one-size-fits-all vehicle. For more information or to determine if an IMEC is right for you, contact Annuity FYI at 866-223-2121.

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