On Apr 23, 10:48 am, oprah.cho...@[EMAIL PROTECTED]
wrote:
> I am 31, net work around 450k and projected to grow at 100k/ year.
> A life insurance agent is trying hard to rope me into a plan where I
> can contribute large amounts to a relatively small policy ( ~1-1.5
> million ). He mentioned something about MEC, where you can not
> contribute too much to abuse the system.
I You have quite a unique situation. What you need is financial
planning that might or might not eventually involve estate
preservation life insurance. $450k net worth plus 100k annual increase
@[EMAIL PROTECTED]
growth for 29 years (to age 60) gives you an estate of almost
$10,000,000, At first glance I would say you definitely need estate
preservtation life insurance. But not the one being recommended.
MEC is short for modified endowment contract. Simply put, MECs are
life insurance policies that are overfunded to the point that the IRS
no longer considers them insurance, but rather an investment. As such,
the death benefit is still income tax free, but the cash value loses
its tax advantages.
My main concern is that the nature of MEC policies is to build-up
large cash values, which IS NOT what you need. You already stated that
estate tax liquidity and preservation are the primary purposes of the
coverage. Utilizing the cash value is contrary to those goals, so why
pay for something you don't intend to use. You need death benefit, not
cash. Besides, insurance is pretty low on the list of cash building
vehicles.
If you need insurance, and I believe you do, then guaranteed universal
life insurance should suffice. Guaranteed UL is permanent insurance,
but builds almost no cash value. It's essentially the cheapest method
available to secure permanent insurance. The only drawback is that if
you ever decide to surrender the insurance you won't get much for it
(but surrendering is also contrary to your stated goals).
Term won't do because the statistics heavily favor you will outlive
its coverage period and leave your heirs with a huge estate tax bill
(which they may or may not have the liquidity to cover). Term's main
purpose is to cover liabilities and dependents that are expected to
disappear over time. This is not the case for you.
One alternative to the guaranteed UL: get a short term policy now
(like level 10 year term) just to "lock-in" your presumably good
health. If in the next 10 years, your future financial forecasts have
not changed, you can convert it to guaranteed universal life. If it
turns out your estate will not be so huge, at least you didn't spend a
lot on insurance. The drawback is that converting is done at your age
when converted, so you may end up paying slightly more in the long
run.
> Is it a good idea to use life insurance as a way to avoid estate
> taxes? I have already maxed out 401k, roth IRA, and traditional IRA.
> I plan to open a SEP IRA next.
Insurance is one of the best ways to avoid estate taxes, but the best
method is through estate planning. Properly designed Trusts can
protect many generations of your family from creditors, estate taxes,
greedy ex-spouses, etc, etc... and will pay for themselves many times
over.
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