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Tax Advantages Of A Modified Endowment Contract

A modified endowment contract (MEB) is a modified endowment contract in the United States in which the excess cash value provided to the beneficiary has exceeded the amount eligible to receive the full benefit of a regular cash value life coverage contract. Unlike other modified endowment contracts, an MEB does not require the purchase of an insurance annuity and does not restrict a beneficiary's access to his or her cash benefit. Instead, it provides the beneficiary with a lump sum of cash that will be invested and potentially mature as a permanent income. It is important for an investor to understand the risks associated with a modified endowment contract.

First, as with any investment, there are some inherent risks that may apply to the account itself, as well as risks that may apply to the account holder. These risks become much more significant if the value of the investment is expected to increase substantially. For example, if the value of the account is increasing, the value of the principal payments is also increasing, and this can reduce the income and revenue of the account. Also, since the principal payments received on a modified endowment contract are tax-exempt, these payments cannot be withdrawn by the account holder until they are fully funded. In addition, there are taxes that accrue on the principal amounts received from these contracts; these payments are therefore a taxable event.

However, an MEB provides a number of advantages over a standard annuity in several different ways. First, with a modified endowment contract, there are additional tax deferred distributions. There are additional distributions received by the account and applied to distributions and guaranteed annuity payments on an annual basis. The additional tax deferred distributions are subject to an additional tax on the basis of whether they are received from taxable distributions received from the annuity plan or from the modified plan itself. Also, there are tax advantages to both the buyer and the seller of the modified endowment contract. Keep reading to know more about this.

When the policyholder sells the plan, the proceeds from the sale are deferred until distribution is made. This gives the policyholder the opportunity to purchase additional cover as needed, potentially lowering the premiums on the plan. Also, if the plan has grown to a point where additional coverage is not needed, the remaining portion of the premiums can be used to provide for distributions without tax ramifications. Essentially, the policyholder maintains continuous coverage for the life of the plan while simultaneously avoiding the higher premium that would otherwise be associated with withdrawals. On the other hand, a standard annuity is designed to provide a fixed premium payment for a fixed period of time.

Once that period has expired, the policyholder faces the prospect of having the entire face amount of the premium paid up and nothing left to help finance future expenses. As a result, with a modified endowment contract, policyholders have the opportunity to take advantage of lower premium payments while maintaining the same level of cover over the course of the seven years that the contract originally was written for. The modified endowment contract also has advantages for the insurance company. If the policyholder leaves the company during the modified endowment contract, the endowments remain intact. They do not have to be surrendered in order to terminate the contract. For this reason, many insurance companies offer a full refund on the surrender fee when a person decides to exercise his option to terminate the policy, regardless of whether the withdrawal is voluntary or not. Head over here for a free consult.

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