Introduction Of Do You Know A Deeper Dive into MECs In Insurance 2022
Do You Know A Deeper Dive into MECs In Insurance 2022. The first seven years of a life insurance policy are important to be aware of that however is it possible that you can run into a modified endowment contract a mech after the first seven years the answer is yes and it’s very important to provide full transparency on this topic?
Insurance policy the terminology
Because people have gotten into trouble with this now it’s easy to prevent and reverse but there’s not much transparency on this so with a life insurance policy the terminology the life insurance industry uses is this guy material change this can occur with a life insurance policy and the outcome can often be a mec a modified endowment contract so.
What is a material change with a life insurance policy well it is an adjustment to the total benefits of a policy specifically referring to the death benefit with a life insurance policy we have the initial what was it that mech limit seven pay premium test first seven years of a life insurance policy now does it stop after the first seven years because I’ve spoken with several professionals that thought that.
A life insurance policy
That thought it had that after the first seven years you’re beyond the mech test you’re good I used to think that when I first got into the industry it doesn’t work like that I wish that it did the mech limit will typically reset every seven years now I say typically reset every seven years if a material change occurs on a life insurance policy that will make the policy subject to a new seven pay test.
A new seven years where the mech limit resets in past videos years ago I’d always say with a mech test you’ve got the initial seven pay test seven years what happens something like this is usually the pattern it follows for every seven years it gradually decreases now you can prevent that as well depending on the company and the design but it will often gradually decrease.
If you’re constantly pumping money into it is the big thing so material change what triggers that so the mech limit can reset every seven years or your policy can be subject to a new seven pay test if there’s a material change or change to benefit to the policy well what are some examples of a material change that’s what would be my follow-up question face amount increase.
Paid up additional life insurance
If I make any changes to the death benefit so if I like to go through underwriting and add a term writer or pump my death benefit up that’ll be classified as a material change if I pump money into puas often people do this for what to continuously grow the cash value however pua stands for paid up editions when I make a payment there those dollars will purchase me paid up additional life insurance additional death benefit.
Which is classified as a material change this is often where people run into modified endowment contracts down the road when they continue to pump money into puas and the policy was not mec tested based on conservative dividends and a guaranteed rate that’s when it happens which is easy to prevent but that’s typically what we see or we’ve seen I should say term rider reduction and or removal.
So if I have a term rider we see this a lot with level term riders that fall off after a certain period if I have a term writer that’s a level seven-year level 10-year level 20-year term rider when that term rider falls off there’s going to be a material change and the death benefit will drop the mech limit will drop and I will be forced to pay a lesser amount of money into.
Life insurance policy once that term writer
That life insurance policy once that term writer falls off with one-year term riders that’s not the case unless I’m manually reducing it or if it burns out altogether company selection is important in that case and I can get very technical there we’ve got other content on that here’s just a bullet point I want to mention we can prevent a long-term mech so I’m specifically referring to this guy.
If you have a policy where you say I want to be able to pay as much money into this policy for as long as possible that is my specific goal here and I don’t want to run into a mech we want to prevent a long-term mech in this case how you do that or how your agent does that is mec test the policy mainly by looking at the guarantees what I like to do in these particular cases if someone says.
I want to have a policy where I just shove money into it I want a 1090 split I want to break even between years three and five and I want to pay into it for 40 years until I’m 70 years old or something like that what I’ll do because this is important is test the policy based on the present dividend rate then also a conservative dividend rate I’ll often cut it in half and then also just the guarantees.
High cash value life insurance products
Because where people have run into mech issues specifically with high cash value life insurance products is when the current illustration said the policy would not mech and it mech down the road it was a result of dividends coming down and that death benefit did not grow at the fast pace that it originally projected on that original illustration the death benefit has a direct relationship to the mech climate no.
That’s technical but it’s easy to prevent as long as you forecast it so let’s continue here with some good stuff we’re going to touch on next the mech limit very important subject here so on that mech limit you can set it wherever you want on the illustrations we touched on earlier it has a direct relationship to an individual’s age and total death benefit. You Can Also Read Starting Policies for the Next Generation For Insurance.
So mech limit again you can set it if I want the ability to pay in 100 000 per year I’m going to design the policy to have a 100 thousand dollar mech limit if I want a policy with a five million dollar mech limit I’m gonna set the policy up to have a five million dollar mech limit or I’m sorry if I want the ability to pay in five million per year I’m gonna to have a five million dollar mech limit.
The term insurance writer
It’s a big number so how do I set that mech limit age total death benefit emphasizing the word total because the term insurance writer and even puas will impact that initially gender and then also the guaranteed rate since the new 7702 change where all life insurance companies typically have different guaranteed rates or can have different guaranteed rates this now.
Becomes um a topic to be more aware of concerning mech testing and again if you’re a consumer and you’re looking at this you’re thinking oh my goodness don’t worry your agent knows all this stuff if you’re working with us we know all this stuff but here we go how this piece works because in the past I’d always say that the mech limit has a direct relationship to an individual’s age and total death benefit.
Which it does but then also I’ve got this to be aware of if you have an old policy with a guaranteed rate of 4 and you’re a 40-year-old male you wouldn’t you would need or would have needed because you can’t get these policies anymore a total death benefit of 2.8 million dollars at a minimum to obtain a 100 000 mec limit so an individual’s age and death benefit the product of a guaranteed rate of 4 per cent 2.8 million dollars gives me.
The guaranteed rates the less life insurance
A 100 000 mec limit if I have a product with a three per cent guaranteed rate now that same 40-year-old male needs a total death benefit of just over 2 million to obtain the same 100 000 mech limit the lesser the guaranteed rates the less life insurance I need to be able to pay in the same amount of money fun stuff right guaranteed rate of two per cent I need a death benefit.
It’s a little bit less than this 1.45 million to obtain that same one hundred thousand dollar mech limit if you have a guaranteed rate of two and a half per cent then I’m going to need just about 1.7 to get that hundred same dollar mech limit and how you can tell is the examples.
