Modified Endowment Contract

A modified endowment contract is also known as a money value life insurance contract in America where the payments paid to have exceeded the predetermined amount allowed for lifetime coverage. The basic concept behind a modified contract is to make the death benefit more reliable and at least ensure that the premium payments received are greater than the death benefit. The death benefit is the face amount given to beneficiaries upon the insured person's death or as specified in the will. With a modified endowment contract, these benefits are increased, thereby making the contract more reliable and providing financial protection to family members of the insured. Furthermore, the insured person pays tax-free premiums, which reduces the financial liabilities of the estate, should the insured die prematurely.

There are some limitations imposed on modified endowment contracts. These contracts cannot be used for insurance on a credit basis, such as credit card plans. Also, it can be used as collateral for a loan, home equity loan, or a car loan. It is not eligible for the application of insurance under the Federal Taxation law. Learn about accessing funds.

There are many reasons why this type of insurance is beneficial. It reduces the financial liabilities of the policyholders, but increases the death benefits and allows the policyholders to draw additional premiums against the enhanced death benefit. However, the modified endowment contract has some disadvantages. First, it has very high premiums. Secondly, the policyholders may be subject to legal action and the Federal tax consequences.

There are two types of modified endowment contract. One is called a non-qualified endowment contract and the other is called a qualified plan. In a non-qualified policy, the insured person pays the premium in installments and makes the initial withdrawals, while in a qualified plan, the insured person withdraws only the specified portion of the premium amount. The remaining amount is invested by the company. The qualified plan allows the policyholders to make the withdrawals without being subject to federal tax consequences.

It is recommended that individuals go in for these policies, which are relatively cheaper than other types of insurance policies. There are some drawbacks. First, they do not provide any kind of flexibility in terms of the life coverage. Second, in case of non-payment of premiums, the death benefit may be reduced or withdrawn altogether.

A modified endowment contract does not guarantee any particular level of interest. If the premiums are not paid for a period of seven years, the company has the right to withdraw the whole premium amount. However, if the policyholder had made timely premium payments in the past, he would be entitled to at least a partial waiver of the withdrawal. Most of these contracts specify that the policyholder may become ineligible to receive the death benefit during the first five years. In such cases, the premium payments are made to the beneficiary for the period of seven years, after which the premium payments could be reviewed if the need arises. Visit here if you want to have a MEC.

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