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As of April 1st, certain life insurance carriers have started to allow their illustrations to reflect the new MEC limits in response to the Consolidated Appropriations Act, 2021 or CAA, 2021. Within CAA, 2021 there are changes to the interest rates used in Section 7702 of the U.S. Internal Revenue Service (IRS) Tax Code. Download our news letter regarding this change below:

Access the Full Article Regarding the Section 7702 Tax Code Update

Why Hasn't Everyone Made the Switch?

However, not all companies have updated their MEC calculations with the new guidelines. Some have delayed this because (I assume) they spend a lot of RD money on revamping their product for AG49A. Even more carriers are likely waiting to see which companies decide to raise their targets, and/or by how much. This would necessitate creating a new product.

I keep hearing advisors and wholesalers falsely state that carriers MUST come out with a new product to take advantage of the changes in the MEC limit. This is not true! Theses carriers are just not going to update their MEC limits because (I suspect) they are likely going to raise targets on a new product. In my humble opinion, it is NOT in the best interest of the clients and the industry to raise targets because of the increase in MEC limits. If the targets are raised for the same death benefit, this just means the clients are paying more fees while getting less!

New Opportunities

The most exciting aspect of this tax code update is the huge opportunity it presents for individuals and families who wish to utilize cash value life insurance products within their portfolio. We can project that cashflow from these types of policies, subject to Section 7702, may be about 25% better than before the tax code update.

There are already many strategies out there designed to capitalize on the accumulation features of cash value life insurance. Policies issued in 2021 (and into the foreseeable future) can be even greater tools to accomplish this goal!

There is no better time than now to revisit your IUL prospects and/or illustrations. If you have any clients who are interested in an efficient cash accumulation tool, the new 7702 tax code update may allow them to put more money towards this objective without running into the issues of creating a MEC.

As you know, once a policy is declared a modified endowment contract (MEC), it cannot be reversed and any distributions from the cash value of the policy can be subject to taxation to the extent that the money in the policy has grown. This is always bad news for your clients.

If you would like to see a proposal (subject the new 7702 tax code update), please follow the link below:

Request a Proposal

Jordan Pence
Post by Jordan Pence
April 11, 2021