Whole Life/MEC

In very laymans terms, can someone please explain to me what a MEC is, and how a whole life contract can become one? I had a broker trying to explain it to me recently, and I didn't exactly get his jibberish.

Thanks-

generally, when a life policy becomes a MEC; what you have done is turn it into an annuity. If you can get an annuity, just get it. Some high net worth folks are capped out and can't get any more dollars into an annuity. So, they MEC.

generally, when a life policy becomes a MEC; what you have done is turn it into an annuity. If you can get an annuity, just get it. Some high net worth folks are capped out and can't get any more dollars into an annuity. So, they MEC.I'm sorry 1MO, but what are you talking about? You should NEVER MEC a life insurance policy...ever. Unless you are looking for maximum IMMMEDIATE leverage. You CANNOT "cap out" annuities, as long as you have some liquid net worth left over...and this caviat is still semantics. Yes, it may be true that well established and AAA companies will limit the percentage of net worth that can be put into annuities, but there are just as many (or more) companies that simply don't care. In fact, one of the highlights (advantages) of annuities is that there is no limit as to what you can put in and shelter from taxes.

With a very tiny percentage that MAY be an exception, MECs are almost always a huge financial mistake.

Keep your life policy tax free...only your annuities shoud be tax-deferred. Most life policies that end up as a MEC are by mistake.

I'm sorry if it sounded like I was saying to:

1. MEC his policy.
2. Convert his life policy to an annuity.

I meant neither. I meant that a MEC is for all intents and purposes a life policy that becomes an annuity. If you wanted an annuity, you should simply get an annuity and not try to turn a life policy into one.

While I don't know the ops situation, the only folks who MIGHT want a MEC, would be an über high net wealth individual who has individually capped out his annuity placement. If this is not the op's situation ... He don't want no MEC.

Remember, the op asked for his answer to be in "very layman terms". So, I tried to answer just that way. Sorry if my attempt to be brief and general was confusing.

Also, while a thousand different companies will offer annuities to anyone in any amount, you are correct that some of the highest rated companies will place a cap on annuities. Further, these companies will do so without regard to what percentage of assets it is to the annuitant. In this case, a MEC can in fact be worthy. ie. a 15MM single premium into a 1MM face policy.

A MEC normally occurs when somebody is overfunding an insurance policy to create extra cash value. The government doesn't want you to make to much tax free money so they put a limit on how much you can overfund your policy depending on your initial coverage and premium. When your policy becomes a MEC you are going to get taxed on your normally non-taxable income growth. Don't let this happen, your financial advisor should be able to tell you the MEC limit for the year.