19
Dec
2018
Lara-Murphy Show Ep. 65
This was a deep(er) dive into IBC mechanics, in response to a friendly wager submitted by two listeners. Specifically:
The controversy concerns two apparently conflicting goals: On the one hand, Nelson Nash says in BYOB that you should pay more against your policy loans than the insurance company requires, effectively buying more paid-up life insurance. But on the other hand, shouldn’t you aggressively fund your IBC policy up to the MEC limit right away, meaning there wouldn’t be any room left to pay more on a loan?
The nature of my policy payments doesn’t prompt or provide structure for loan repayment in anyway. They don’t even have pages on the site dedicated to sending them money in any way.
Point I’m making is, the discussion these two friends were having didn’t hit close enough to home, but brought up a third avenue that would also be valid in terms of being your own banker. In the loan repayment case, the very last payment(s) would be paid as PUA, not loan repayment. This would either have to be made explicit with the company, or it just slips in there no questions asked. In either case, why can’t you just do this anytime with any windfall?
Critical question that hasn’t been made clear to me yet, what is the limiting factor on Becoming a MEC?
I think it’s this thing…
https://www.investopedia.com/articles/insurance/10/avoid-modified-endowment-contract-traps.asp
Largely arbitrary limits placed for tax reasons and you need to be a top flight spreadsheet jockey to play it just right.
Hi Patrick,
At the risk of sounding like a car dealer, I think you should get our new book The Case for IBC. We explain a lot more about this stuff. It would be hard to try to answer your questions in a blog comment section.
But Tel is right that the Modified Endowment Contract (MEC) rules were instituted by Congress in the late 1980s to limit the ability of wealthy people to use whole life policies merely as tax minimization vehicles.
Do you cover the MEC limits in The Case for IBC?
We talk about their historical origin but I don’t think we explain the actual rules.
I just read through that Chapter. I get the historical story now, it might make a good episode of Lara-Murphy to talk about MEC limits. What IBC would look like without them. If there is any theoretical world where the rules could be reversed or lightened.