The Policy Design
a. Not a MEC
It's important to ensure the cash value policy is not a modified endowment contract (MEC) and it stays in force.
If a policy becomes a MEC, distributions would be subject to Federal income tax to the extent of gain in the policy. In addition, if the insured is under age 59.5, a 10% penalty would apply to taxable distributions, including loans! If a policy lapses, whether it is MEC or not, tax would be applicable to the above menthioned distributions. So it's extremely important to design the policy not a MEC.
b. Minimum Death Benefit
When design the policy, it's important to minimize the death benefit as much as possible, but at the same time without causing the policy to become a MEC. In this way, the policy holder could maximize cash accumulation. This requires the insurance agent to compare different insurance companies' different cash value products and find the best one for a client.
c. Maximum Policy Loan
The goal of a cash value policy holder is to maximize the cash takeout to supplement retirement income, while making sure the policy is not a MEC or lapse. A careful design is needed here to accomplish these multiple goals.
Next, we will discuss a case study and how a cash value life insurance is designed and used.