When It Actually Makes Sense to MEC Your Life Insurance (Ep. 373)

If you guys are listening and you’ve come into some money, and you’re saying, “Hey, I just want a single pay premium,” but everybody says a MEC is bad. A MEC isn’t the end of the world. It’s not ideal in some situations, but here is a strategy where a MEC may be worthwhile. And you might just call us and just walk through that with us so that we know, okay, is it gonna be good? Is it not gonna be good?

Hello, hello, and welcome back to the podcast. Thank you very much for being here. All right. Today, John and I are gonna talk about a MEC, because a lot of you that know infinite banking understand that MECs are not ideal. So a MEC stands for modified endowment contract, and if your policy becomes a MEC, that means that it is taxable when you go to borrow money.

The death benefit is never taxable, but it is taxable when you go to borrow money. So in the industry, they talk about first in, first out, last in, first out. What that means is if your policy does not MEC, what you put in first comes out first. That’s why it is income tax free when you borrow the money.

But if it MECs, now it acts like an IRA, and it is last in, first out. So last in is growth of the policy, but that’s coming out first. And we’re gonna go over some examples, and John is here ’cause John had a really good case of why it’s okay if a policy does MEC. It’s not the end of the world. So we’re gonna show you some numbers.

But most people don’t talk about this in the industry. And so what we don’t want to do is be taking a loan. If we borrow money, they’re gonna give us the growth of that money first if it MECs. And we have to take all of that before we can get to the money we put in. So when we do that, we’re paying tax upfront on everything, and it acted like an IRA. Not the end of the world, right, John?

No, but it’s just not ideal in most scenarios, right?

Right. And the scenario depends on age really in this case, and I think that within the infinite banking world, you would probably agree, we hammer home, “No MEC, no MEC, no MEC.”

Yeah. “We know what we’re doing, so it doesn’t MEC. Is the insurance company gonna catch it if it MECs? What happens if it MECs?” Like, we’re so concerned about it. But when you actually break it down and learn how it works, like you’ve just kind of been exposed to it for the first time — yeah — of how it actually works, and you’re like, “That’s not that bad.”

Well, I’ve never done one personally, and we just went, you know, last month to Indianapolis to the home office, and there’s another agent that kind of went through examples, ’cause he does them all the time. And it was like, oh.

Mm-hmm.

I was shocked to see that that’s pretty much what he does exclusively with his clients.

Yep.

’Cause I thought that was terrible, you know? And I was like, “Geez, this, there’s got to be more to this that I don’t know.” And there was, of course.

Yeah. But after you listen to him talk, it was like, yeah, I mean, definitely not for everybody, but there are a lot of scenarios where that might be the way to go.

And I’ve done policies at MEC before, because in the right situation, it totally doesn’t matter, because the death benefit is not coming to the beneficiaries taxable. So it’s okay. It’s still income tax-free money on the death benefit side.

Yep.

And I think that we have to put into perspective the MEC piece of it.

Nelson wants us to get started on the whole banking system early in life. And as you will see with the numbers, the younger you are, a MEC is gonna be an issue. But the older you are, if you’re seventy-five, eighty, eighty-five, a MEC isn’t a big deal because you don’t really have that much longer to live. Okay, let’s just —

The reason —

— why is because — that sounds bad, but let’s be honest, the clock is ticking.

Yeah, and it’s because you’re when you’re young, your cash flow is gonna grow so much over those years that you’re gonna have a lot of taxes that come out first. The older you are, the less growth you’re gonna have to pay taxes on when you do take cash value loans.

Yes, and let’s also talk about this. If a policy MECs, it cannot be reversed. So let’s say that you overpaid your premium, and it MEC the policy.

Every single time the insurance company gets a payment, that payment goes through a MEC calculation. If it MECs the policy, then they send you a letter, and you have thirty days to respond. They will mail you back a check for what you overpaid. They’re not going to allow that policy to MEC.

You have thirty days to respond. If you do not respond in those thirty days, that policy’s gonna MEC, and you cannot reverse that.

Yeah.

And so you want to open your mail from the insurance company, okay? If you are a client, open your mail. If it says One America or whatever company we used, you want to make sure you don’t just throw that in a pile for the next six months and go, “Oh yeah, I’m gonna look at that.”

Yeah, sometimes you gotta read that. Now, we also, as your agent, we get those letters. And let me tell you, Jess in our office is a crazy fool. If you have a MEC, you’re gonna get called fifteen times a day until you answer your phone, and that thing is gonna get signed and sent back immediately, okay? So we do make sure that we take care of you. And those letters come to my email now, but hey, you know what? Post office is not reliable. Email is not one hundred percent reliable. And so if they can double up and we can make sure you gotta do your part, we’ll try to do our part to make sure that something doesn’t MEC. But once it does, it’s gonna grow taxable. So let’s go over a strategy of when this would matter and when this does not matter.

So tell us about your client, and then I’ll share my screen, and we’ll look at our options.

All right. So this gentleman here, he actually just started this first policy with us like a year and a half ago or so. And so, you know, met with him last year, no big changes were on the horizon at that time.

Well, he called me a couple months ago now, and they have a dairy, him and his dad do, and they’ve had some changes in the local milk market. They’re — the place they delivered their milk moved to Texas, and they’re in California, so obviously they lost their destination. So they’re basically liquidating the dairy.

And so this guy, he’s fifty-four, and his dad is eighty-two, and they’re basically half owners of this dairy. So they’re in the process of liquidating, they’ve already gone through a bunch of it and, you know, sold a bunch of cows and all that stuff, and I think he said that they’re gonna gross about twenty million or so on this whole deal.

But then you pay off some loans. That’s — the taxes in California were staggering, which that was insane. And then basically the gist of it was that they’re each gonna end up with, like, three million or something at the end of the day. Mm-hmm. And so he asked me, “Is this something that we can just slam into a policy?”

I know it’s possible, but I obviously just wanted a second opinion here just to make sure that it was the right case. So we had a meeting with him last week, and we presented some options.

’Cause there’s multiple options.

Yeah.

It’s really what fits the client, and this is why it’s important to have meetings with clients.

Because what does he plan to do in the future? Does he plan to retire? Does he plan to start another business? Does he plan to ranch? Does he, is he, are they gonna sell the ranch? Like, there were a lot of questions. Yeah. And I know he kind of wanted the answer real quickly, but I can’t give you a quick answer without knowing some of my own answers, right?

Yeah.

He didn’t — he doesn’t really know why or what he is going to end up doing, which is —

Right. — typically we do like a ten pay — yeah — which adds complication to the whole case because — yeah — if we have three million, now here’s the thing we have to understand in this situation. It is a one-time amount of money.

This is not coming every year. So we have an option with three million. We have the option where we could do a ten-pay policy where we move three million in over ten years, right? Three hundred thousand a year. But in the meantime, what do we do with the money? Okay. And he doesn’t want that. He doesn’t want a policy that’s gonna have premium going further past a year.

Mm-hmm. Because he does not know what he’s gonna do. He does not know if he is going to have a job, if he’s gonna work. He doesn’t know what his cash flow is. He doesn’t know if he’s gonna retire off the three million. And so a single pay was very appealing to him in that regard because we gotta figure out what we’re gonna do.

So let’s first look at what our first strategy was, which was a MEC on him.

Yep.

So I’m gonna share my screen. So if you guys are not watching on YouTube or on Spotify, and you are on that silly iPhone app, get off of there and go over to Spotify or go over to YouTube, and then you can see the numbers, and it’ll all make more sense.

So if we did, and we just — we didn’t take all three million dollars of his, we took two million — yeah — as an example. Okay? So if we do that, we have two million dollars going into this policy, and you can see here at the top of our screen it says MEC, yes, year one. It’s creating, and I think this is important.

He can put two million dollars in here, and it will immediately double his money and death benefit. So he’s got four point four million dollars of death benefit immediately, which is fantastic for his heirs. And he’s got one point eight million dollars of cash value that he could borrow right away. Okay?

So if we look at this, the MEC happened year one. But what happens when a policy MECs is you don’t actually pay tax when you borrow until your cash value you borrow is more than what you paid in premium. So year three, he’s still good, right? Yeah. He’s got one point nine nine four million dollars.

Year four, he’s got two million eighty thousand. So if he borrows year one, two, and three, he’s totally fine. They will deposit the money in his account, no tax implication. If he borrows the full amount in year four, he will get sent a ten ninety-nine from the insurance company for eighty thousand seven hundred and thirty-five dollars in this example. He will have to pay tax on that.

As ordinary income, and he’s under fifty-nine and a half right now, so they do a ten percent off the top as well.

I thank you for — I always forget about the fifty-nine and a half.

Yeah.

So yes, you’re gonna get penalized for that as well. So now this is where it gets tricky. So now he’s borrowed two million eighty thousand. That becomes his new basis. So for those of you that don’t understand what that fancy terminology is, that basis is how much money you’ve paid in.

So when you borrow the eighty thousand seven hundred thirty-five dollars, you pay tax on it. So now the IRS says, “Well, you already paid tax on this eighty thousand, so you don’t have to pay tax on it again.” So that now your new basis is two million eighty thousand seven hundred thirty-five dollars. Next year, if you borrow again, now you’re going to have to pay tax on the difference. So your cash value went up by ninety thousand dollars, so you’re gonna have to pay tax on the ninety thousand dollars if you borrow that.

Again, that becomes your new basis.

Yep.

And in his case, he might be over the fifty-nine and a half at year five, so then he would avoid that ten percent.

Now it’s not a big deal. It’s like ninety thousand dollars. Some people might say, “Oh, it’s ninety thousand dollars, not a big deal. I’ll pay taxes on that.” Okay. Well, what happens if, in this scenario, because he’s young, what happens when he gets down to sixty-nine, for example, and his cash value went up by one hundred thirty-two thousand a year?

He now has one hundred thirty-two thousand dollars of ordinary income if he keeps borrowing every single year. That can get to be a tax problem.

Yep.

And so we really have to look at, is that the best strategy? Because he’s young, he might be borrowing this money at seventy-nine and it’s one hundred seventy-eight thousand dollars of growth that year. Or at eighty-nine it’s two hundred thousand dollars of growth.

That’s a lot of income tax when you’re eighty-nine years old.

Yeah.

And he may not, but it’s something that we have to have a conversation with you guys about when we have a meeting. Okay? The other thing to note here is he put two million in. If he lives to eighty-nine, there’s seven point eight million of death benefit. Income tax-free still.

I know I’m not gonna complain about that. Are you, John?

No. I was just gonna do the math here and what he paid per dollar then. That’s twenty-five cents a dollar that you’d have that death benefit for in that scenario.

Yeah. When we’re looking at cost per dollar of death benefit, which John and I look at a lot, a single pay is the cheapest dollar you’re ever gonna buy, but it MECs.

The only way to get around this MEC is if you have an existing life insurance policy and you have cash value in there, you can ten thirty-five that into a single pay policy and make that your premium, your single pay premium, and it will not MEC on you. Oh. But you already have to have an existing life insurance policy.

Yeah. So I said to John, after we got off the call with this guy, we were just kind of talking strategy still. And, in case you guys don’t know, I’m a verbal processor, so I think a lot better when my mouth is moving. And and so I said to John, “Well, what if instead of buying a policy on him, what if he uses his two million and buys a policy on dad?”

Now, in this scenario, dad is eighty-two, and his mom is seventy-seven, and in worse health than dad.

Yeah. But we’re gonna show you dad.

So dad is eighty-two, and if we put two million in a policy on dad, now we’ve got two point four million of death benefit. Not super spectacular, right? On him, we doubled our money. Here, we gained four hundred fifty thousand dollars. Like, not super-duper amazing.

However, on what we’re talking about a MEC, so on dad right away, we’ve got one point nine million. But this thing MECs already, or I’m sorry, it already has growth in year two of four thousand seven hundred twenty-six dollars. So if he takes a loan, he’s immediately going to pay tax on the four thousand seven hundred twenty-six dollars. Here’s a reason we looked at dad is because he can proba— he’ll probably be okay taking sixty thousand or so.

If he needs to access the money, he’ll be okay taking a loan every year and paying tax on sixty thousand dollars, right? Yeah. Because if dad dies at ninety-seven, he’s growing by sixty-five thousand dollars a year. Dad passes away before we get into that one hundred fifty thousand, two hundred thousand of growth.

Now also, if dad dies at ninety-seven, in this example, he gets three million of death benefit. Now providing there’s no loan, but he’s got three million of death benefit. So we took two million and turned it into three. That’s a sixty-five cents on the dollar. That’s still not a bad return. Yeah. Yeah. It’s not a bad return.

I have used this strategy before. I have a client who is actually a life insurance agent with one of these F named companies, and he buys his life insurance from us. And he said, “I want to buy a policy on my dad. He’s eighty some years old.” And I said, “That is a horrible idea. Why would you do that?

Like, you’re not making any money.” And he said, “Because I have to pay for his funeral. So I want to put one hundred thousand dollars in this thing, and I’ll have like one hundred forty thousand when he’s likely to die. So I’ll get my one hundred thousand back, and I’ll have the forty thousand dollars for dad’s funeral.” And I said, “Well, that’s genius.” Because I had not thought of that. So in this scenario, we’re kind of looking at the same thing. He put two million here, had access to it while dad was alive, but when dad died, he made more money. Like, he made another five hundred to a million dollars, and he got all his money back.

And it was never, I mean, it was never at risk anywhere there.

There’s no stock market variability to that at all. You know, it’s just the taxes that he’s gonna pay to borrow it from the cafe.

Yep.

So there are times where this is going to make sense to do a MEC, and there are times where maybe we just don’t have to worry about it so much because that strategy does make sense because we’ve come into this huge lump sum of money, and now we have to do something with it.

I don’t love the MEC on him, I’ll be honest.

Not the best strategy in the world. The gentleman that we learned from when we were in Indianapolis, what he does, great strategy. If we did do the MEC on the kid, he could borrow year one, two, and three. He could borrow the money. He could go use it to buy another ranch. He could use it to buy rental properties.

He could use it to buy whatever, and then never borrow after year three. Yeah. So year four and on, he’s never borrowing the money. He borrowed it right away. We used it to create a cash flowing asset on the other side. That cash flowing asset is paying that loan back, and we only paid premium one time.

Yeah.

So in that strategy, it’s also very good. The other thing to think about, and John and I were talking about this before I hit record, is let’s say you don’t borrow the money year one, two, or three, but you wait till year fifteen to borrow the money. You’re gonna have a huge tax bill because now if you borrowed the max amount of money, all that growth is coming out first for fifteen years of growth.

Where if you borrow it every year, it’s less painful.

’Cause because you’re resetting your cost basis every time.

Correct.

Correct. Yeah. So not the end of the world to have as a strategy. If you guys are listening and you’ve come into some money, and you’re saying, “Hey, I just want a single pay premium,” but everybody says a MEC is bad.

A MEC isn’t the end of the world. It’s not ideal in some situations, but here is a strategy where a MEC may be worthwhile. And you might just call us and just walk through that with us so that we know, okay, is it gonna be good? Is it not gonna be good? It’s kind of the same thing with, I have a client right now that I have not talked about MEC policies probably twice in sixteen years.

And in the last month and a half, it’s been pr— I’ve had, like, three or four of them for whatever reason. Hmm. But I ha— I have a client that came into a large sum of money, but he also wants long-term care. Oh. And so he wants to do a single pay premium. He wants to borrow cash value year one, pay for his long-term care, and then pay that back.

But the policy would be in the trust, and they don’t plan to use that policy, so he doesn’t really care about the MEC or he wants to do one on his wife, so there’s something there, but we don’t have to pay premium forever. So as long as you guys know and you’re comfortable with, “Hey, this is what’s gonna happen,” and the life insurance company manages that.

They’re sending you a ten ninety-nine. You’re not having to track anything. I don’t know. I’d probably be pretty anal about it, and I would track stuff as well, just to make sure I’m not being double taxed for some crazy reason. But the insurance company’s gonna be right. Like, they’re rarely ever wrong on accounting.

And so you’re gonna get a ten ninety-nine every year, and they’re gonna track all of that for you, and then you will have to get your accountant involved. I always think it’s funny when clients are like, “Well, what do I have to let my accountant know?” Nothing. Your accountant doesn’t even need to know you have a policy because there’s no tax implications.

Correct. Well, here, the accountant needs to be involved.

Yeah, and just like you said, though, I mean, it’s not a bad thing, but you do need to take the onus and know and understand what the consequences of that are.

Like, uh, this guy we’re talking about here, he has been keeping up on listening to the podcast and stuff and staying educated on infinite banking in general, so that’s why he even thought about this.

But like if he was totally checked out on the concept or something, I wouldn’t feel comfortable doing this with him at all because he just wouldn’t be able to keep it straight.

Yep. And that is very important. Those people probably won’t call us because they’ll never hear the podcast with the strategy.

Yeah, that’s true. Um, but yeah, our clients that are like him that are keeping up all the time, like thank you, because you make our job a million times easier. We’re not starting over every single time.

Yep.

I had a client earlier this week that called and said, “Mary Jo, I don’t have any money. I can’t pay my premium.” And I said, “You have twelve thousand dollars of cash value. What do you mean you don’t have any money?” He’s like, “Well, I don’t know. I didn’t know. I’ve never taken a loan from it, so I was kind of scared to take a loan.” And then he has another policy that has twenty thousand dollars in it. And I’m like, oh.

“You have thirty-two thousand dollars.

You’re rich.”

Yeah.

For his scenario, it happened to be a lot of money. See, what a good phone call that was for him.

Yeah. I said, “Look, I just found you a bunch of money today.” But he has not been listening to the podcast, right? He’s put it there and he believes in it and he loves it, but he hasn’t pulled the trigger to take that first loan.

Yep. So when we don’t pull the trigger to take that first loan, we feel like, ugh, it’s kind of scary. I don’t know, just take the loan.

Yeah.

And then pay it back right away if that’s the case. But if you are paying attention, Nelson said, “If you know what the problem is, you know what the solution is.” And we know what the problem is, and the solution is gonna be infinite banking in this particular case with a MEC policy maybe. Yeah. I don’t know. We don’t know what the client’s gonna do yet, but I just thought it was a really good case study to share so that you guys listening can say, “Oh, look, that does make sense.”

And I also am gonna pat us on the back once again. I seem to do this all the time when you’re on. But I’m gonna pat us on the back once again about the fact that we have those long conversations and that relationship with our insureds. So we know what our clients are going through. We ask a lot of questions, and I just hear so many people saying, “Well, this is just what I was told to do.”

Yeah, I’m not like. In this case, we’re not telling him to do anything. He obviously has a lot of different choices he can do with this money. Right. But he at least has all the options now.

But they’re being told what to do without anybody asking them questions about goals in life. What are our goals at fifty-two or fifty-four?

What are our goals with two to three million? Like, I had a lot of questions about what are we going to do. Are we gonna have a business? Are we gonna retire? Like, his plan is going to be determined a little bit based off of, are we gonna work or not? Because if he continued to work, if he told us, “Oh yeah, I’m gonna continue to ranch,” or, “I’m gonna start another business,” or, “I’m gonna go buy rental properties,” then our strategy would say, “Hey, don’t let that policy MEC. Do it on you, and continue to pay premium forever.”

Yep.

But we don’t know if if there’s gonna be money to pay premium continued on, so.

Yeah. Well, he, yeah. And, he doesn’t know if he’s moving. I mean, he might move to a different state or something, too. Yeah. Which affects his taxes big time.

I’m encouraging him to move out of California.

I’m like, “You need to leave.”

We got somebody in the state with no state income tax. I was like, oh my gosh.

Yeah. He, uh, he’s — glad I moved up there — you’re in Lakota. Come on. Welcome aboard. Yep. Like we’ll take you. That is crazy. Yeah, it was staggering.

Yeah. It, California taxes are crazy, but … All right.

Do you have any thoughts that I maybe missed or anything to say, final thoughts?

No, my, my biggest little tidbit’s that ten percent thing. We always forget that, so I made sure to keep that one locked and loaded for the day. But —

Yeah.

Uh, no, I think we, think we covered that one pretty good.

Yeah. John reminded me of that, ’cause I forget about it. But yeah, so let us know if there’s anything that we can help you guys with. If if you’ve gotten your book, and you haven’t scheduled your appointment yet, just get it scheduled. Like, you’re not gonna know how to move forward without the meeting.

I had a client meeting, I don’t know, earlier this year, met with him again this week, and he’ll probably be listening to the podcast. ’cause he’s an avid listener as well, thank you very much. And he was like, “Oh, I just want to start policies on the kids.” Well, they also sold some farm ground, paid off a bunch of debt, and I’m like, “Okay, well, we should probably get some of that through,” ’cause the owner financed the buyer.

And so we talked about strategy of are you gonna borrow, are you gonna pay cash, are you gonna call the note? There were a lot of strategies, and then there was some mindset shifting that had to be done because we’re coming from a situation where we’ve never had any money immediately to a situation where we do have money, and that is a very different paradigm.

Yeah, I mean, it’s a totally different scenario than we had with this. That is a very different emotional experience of how to think about money, how to handle money, and so those conversations are very important. Not an email. That’s not an email to an agent saying, “Hey, I need help.” So call us if you need help.

We can walk you through those things, and that was his second meeting. He still doesn’t have a policy because that’s our job is to help you and get you in the right position. So having a phone call is never bad, as long as you’re ready to take the steps to move forward if you’re not ready right away.

So read the book, get the book, farmingwithoutthebank.com. You can email us, Mary Jo at Without The Bank, John at Without The Bank. Schedule an appointment with either one of us. We’re happy to help. And outside of that, you have a fantastic rest of your day.