What The Heck Is A MEC?

by Darren Hardersen |

There have been a number of recent articles in local media touting a “safe money” financial planning strategy involving what’s called a Modified Endowment Contract (MEC). A “MEC” is simply an overfunded life insurance contract that’s treated differently for tax purposes by the IRS. While the
“MEC” concept has been around for years, historically, they were not overly advantageous and not widely recommended. However, a number of insurance companies are now offering more efficient policy designs without built in surrender charges. These new policies make the “MEC” concept very appealing for the client looking for the ultimate safety, growth potential, and liquidity.

While all of our valued clients are unique with their own individual financial goes, the majority want at least some of their money to be very safe without direct market risk. They also highly value a certain portion of their money to be liquid, and offer a reasonable rate of return.

The “MEC” design is an excellent Bank CD alternative. While most bank products are safe and liquid, they offer virtually no return. The “MEC” will keep your keep your money completely accessible and safe, but also give you the opportunity for high returns. Many of insurance policies
credit interest based on the returns of the S&P 500 without the risk of loss if the index goes down.

Here’s a real world example: in a recent quarterly review our valued client was asking what to do with a $100,000 CD coming due.

Recently, a few insurance companies have eliminated surrender charges altogether. So this means not only can you keep your money completely accessible and safe, but you have the opportunity for high returns. Some of the contracts credit interest based on the returns of the S&P 500 without the risk of loss if the index goes down.

In a really good year you could conceivably earn double digit returns without stock market or interest rate risk. That is a very attractive risk adjusted return.

So, if you are looking for a safe place to stash some funds with a decent upside and full liquidity look into a no surrender charge modified endowment contract.

–– Darren Hardersen is an independent financial advisor .