Over the past few years, many of you have taken advantage of liquid modified endowment contracts as a way to safely grow your money without stock market or interest rate risk. These insurance contracts, which have similar properties to deferred annuities, can be designed without upfront loads or back-end surrender charges and with full liquidity. However, unlike deferred annuities, modified endowment contracts provide an income-tax-free death benefit.
Certain modified endowment contracts provide a sizable tax-free long-term-care benefit if the insured is unable to perform two out of six activities of daily living. This is an extremely valuable benefit as the population is living longer and the future need for long-term care is expected to increase along with longevity.
On the growth side, the contracts earn interest (currently up to 9 percent) in the years the S&P 500 is up but does not lose in the down years and all gains are locked in annually. Historically, the S&P 500 is up about 70 percent of the time. After insurance costs are deducted, the net expected return is about 4.5 percent to 5 percent. However, those insurance costs, as noted previously, provide the owner with a large, tax-free life insurance benefit.
This vehicle is very attractive for those looking to get full access to their money, high-risk adjusted returns, cover potential long-term-care expenses, and leave their heirs a larger inheritance. However, the insurance companies I have been working with have indicated that they will be phasing out the full liquidity features on contracts issued after June of 2019.
Keith Singer
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