Niche Life Insurance Carrier, Permanent Insurance & MEC's

First, let me say thank you if you have the patience to stick with this message long enough for me to give you the background. I have being doing business with a niche life insurance carrier since 1991; Navy Mutual Aid Association http://www.navymutual.org/aboutUs.asp They describe themselves as "Navy Mutual is a nonprofit, federally tax-exempt, mutual benefit Veterans Service Organization which was established in 1879 by sea service members for the purpose of providing financial protection to the sea service member and family." Over the years I've taken out four :Permanent Plus" policies for a total face value death benefit of $260K. Each policy was paid off in 7 years. In 1991 the crediting rate was 9.25%. It has understandably decreased over the years and now stands at 7.4%. The organization is well rated by Fitch http://www.navymutual.org/dynamicdata/data/Fitch%20Review%200909.pdf but doesn't seem to be rated by Moody's, S&P or AM Best.

I am 47 years old, divorced with no children and considering buying more Permanent Plus insurance primarily as a savings vehicle. I am so sick of the gyrations of the stock market that I want to diversify my investments further. When I look at the CV of my combined policies it's $89K and I've never lost sleep over the money I've put into those policies. I fully fund my Roth IRA and government Thrift Savings Plan. Now my questions;

1) Should I be suspicious that only Fitch rates this organization? With the scandals in the investment community lately I'm in the "trust but verify" mode with my financial dealings.

2) The latest quotes and projections I've received for more insurance gave me pay for 5 year, pay for 6 and pay for 7 options. I've been reading up on MEC's and the pay for 7 year rule. Is it possible to pay for 5 years or 6 years and still not be classified as an MEC? On each quote NMAA says "Based on our understanding of current tax law, this plan, as illustrated, would not be classified as a Modified Endowment Contract." Is this possible.

3) Even if I dodge the above question and choose the pay for 7 plan do you think buying additional coverage as a savings vehicle with this crediting rate is wise for my situation?

Many Thanks!!!

Never buy insurance if all you want is the savings vehicle because the death benefit ain't free.

I copy your recommendation and totally see the point. Let me ask further that if the cost of "buying" the death benefit is acceptable (to me of course), is it possible it's worth the tradeoff to secure a investment that returns tax-deferred 7+% that let's you sleep at night? This is a non-profit company with no paid sales force and very little overhead so perhaps the cost of insurance is less than offered elsewhere. Under those circumstances could the cost of "buying" the death benefit be worthwhile to enable me to tuck away some cash?

The projection for their pay in seven years plan is based upon a projected rate of 7.15%. Given my history with them over the past 17 years I have every reason to believe they will deliver. The annual premium/$100K of coverage is $4,452 so total premiums paid is $31,164 at the end of the 7th year. The projected cash value at 7.15% is $39,343 at the end of the 7th year. Under these circumstances would you still make the same recommendation? Thanks for a second look.

Are they saying you're going to have $39K after 7 years, meaning they've provided you with an actual illustration.

Or is $39K what you get after crunching numbers?

And is this some kind of VUL or EIUL type policy or is this an "old school" whole life policy?

Their illustration at 7.15% shows a CSV of $39,343 and a death benefit of $103,925. (The current crediting rate is 7.40%)

NMAA describes the policy as "...whole life which combines the protection of permanent life insurance with the cash value growth of universal life insurance".

Here's the actual numbers from an existing paid up policy;

In 1994 I took out a $80K policy in a pay-in-7 plan. I paid a total of $11,524.80 in premiums. The current CSV is $28,387.55 and the death benefit is $95,905.00.

If I'm on the right website, it sounds like you can borrow up to 75% of the cash value at any time. So if you multiply all the projected cash values by .75, you'll probably find that the amount you can borrow will equal what you paid in somewhere around year 10. That seems like pretty standard performance to me. But I'm going to stick my neck out and say there's a question behind the question...

You've lost a lot of money in the market and you're looking for shelter. That reaction is pretty easy to understand. But realize that you probably cannot save your way to retirement. Like me, you probably cannot afford not to take risk. You just don't know where to put your money, so you're thinking about the mattress-with-a-death-benefit plan. I'm going to throw out something better, albeit riskier.

Low cost index funds from people like Fidelity, Vanguard or T Rowe Price. I especially like the target retirement funds. I think they all have them. I sing the praises of these things wherever I go. It's investing for dummies and that's me to a T. It's also investing on auto-pilot. With a target retirement fund, it's like betting on the capitalist system AND you've got someone reallocating your funds for you over the life of your investment.

If you've never heard of a target retirement fund, google it.