Financial Swiss Army knife

Throughout the financial planning process we must address numerous concerns. Is there ample liquidity? Is there a growth strategy? How can we mitigate risk? How can we create sufficient lifetime income? How can we plan for potential future long-term-care needs? How can we maximize the inheritance we leave our heirs? Finally, how can we reduce the amount of taxes our family has to pay to the government?

Many investors utilize annuities to conservatively grow their money and to potentially provide lifetime income. Deferred annuities do not receive a “step up” in basis at the time they are inherited so they may not provide the most tax-efficient inheritance for one’s heirs. However, there is an underutilized product that has some similarities to an annuity called a modified endowment contract that provides an income-tax-free death benefit. Aside from a powerful tax advantage over annuities, modified endowment contracts can be designed with 100 percent liquidity to serve as a higher-yielding alternative to savings accounts. They can also earn interest like an index annuity based on the performance of a stock index without market risk or interest rate risk.

Modified endowment contracts typically provide a substantial tax-free death benefit that will greatly exceed one’s account value. Many contracts allow the contract owners to access this additional pool of funds — not only upon death, but in the event that they are unable to perform two out of six activities of daily living.

This could be a very valuable benefit because numerous studies indicate that between 60 and 70 percent of people over the age of 65 will need long-term care. In summary, a properly designed modified endowment contract can be the following: a higher-yielding secure savings account alternative; a conservative growth vehicle; a provider of tax-free long-term-care benefits; and a substantial income-tax-free death benefit for one’s heirs.