Modified Endowment Contracts

Use CVAT when?

- Client doesn't want strict limits on amount of premiums that can be paid into LI policy. - Client prefers max DB on policy at life expectancy. - Client chooses level DB and wants to pay max 7 pay test premium. - Client wants to make large first year drop in or has large 1035 exchange.

What are the 2 MEC tests?

1. CVAT - cash value accumulation test 2. GPT - guideline premium test

What is a MEC?

A modified endowment contract.

Both MEC tests define the relationship between ______ and ______.

cash value, death benefit

What is the basic difference between the CVAT and the GPT tests?

The CVAT limits cash value relative to death benefit and GPT limits premiums paid relative to death benefit.

Describe the CVAT test.

The CVAT test maintains a single net premium relationship between cash value and death benefit. For every dollar of cash value, the death benefit must be at least the amount that could be purchased on a guaranteed basis using the cash value as a single net premium.

Difference in how CVAT and GPT defines the relationship between the cash value and the death benefit?

The GPT actually defines the relationship between cash value and the death benefit by finding permissible cash value based on corridor percentage test whereas in the CVAT the cash value limits the death benefit.

Use GPT when?

- Client wants to use variable death benefit and pay max level ongoing premiums for more than 10 years. - Client more interested in lifetime cash accumulation and max policy distributions rather than max DB at life expectancy. - Client wants to pay the 7 pay premium longer than the initial 7 years. - Client wants to max the cash value and DB in later years.

Why do I NOT want a MEC policy?

Distributions from a MEC policy are taxable as income in the year received to the extent that the policy cash value before distributions exceeds the policy owners' investment in the contract.

Describe the GPT test.

For the GPT test, limits on premiums paid are based on the death benefit. For a given death benefit, GPT defines a guideline single premium and a guideline level premium. Payment of premiums in excess of these amounts are not permitted. Essentially, the GPT the death benefit limits the premiums that can be paid or the cash value that exists.

Basic definition of when a contract becomes a MEC?

The accumulated amount paid under the contract at anytime during the first 7 years exceeds the sum of the net level premiums which would have been paid on or before such time if the contract provided for paid up future benefits after the payments of 7 level annual premiums.