A while back, we attended a training where one of our colleagues waxed poetically about what he called “the best financial product”.  He lauded about how his clients loved him for solving many of their core desires – safety, growth, and liquidity with tax advantages; not to mention benefits for long-term and chronic care with this little known–under used financial instrument. [continued below video…]

Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities and Non-Variable Life insurance unless otherwise specified. 

We were slightly surprised when he mentioned it was an Index Modified Endowment Contract – only because it seems that very few advisors understand IMEC’s and how to utilize them properly. Like our colleague we have also utilized index modified endowment contracts often to help our clients balance their retirement portfolios for safety without sacrificing meaningful growth potential. It is important to know that all IMECs are not created equal; just like annuities, there are many different IMECs and companies that make them available.

Are these really “the best financial product”? Let’s look at some of the Pros and Cons of IMECs in general.

PRO’s:

1. Annual Locked In Cash Account Value;
2. Lump Sum allocation typically $50,000 up to $1,000,000;
3. No 1099s or IRS Tax Reporting Required (withdrawals may be taxable);
4. High earning potential (Cap Rates up to 17%);
5. Many Popular Market Indices (DOW, S&P500, NASDAQ, Russell, etc.);
6. Many Popular Index strategies(annual pt-pt., spread, monthly sum, etc.);
7. Limited Market Upside with No Market Risk;
8. Minimum Guarantees up to 3% (can offset fees and costs);
9. Average Interest potential based on back testing up to 8%+;
10. Third Party Rated for Safety (A+ or Better Available);
11. Tax Deferred Growth;
12. Tax Free Wealth Transfer Death Benefit for Heirs;
13. Heirs are Guaranteed Tax Free up to four-times the initial contribution/premium or more;
14. Advanced IMEC strategies can transfer tax-qualified wealth Tax-Free to heirs;
15. Tax Free Long Term Care Options Available;
16. Tax Free Home Health Care Options Available;
17. Tax Free Chronic Care Options Available;
18. Cash Access High Liquidity;
19. Potential for No Surrender Charges;
20. Built on a Life Insurance Chassis;
21. Can be Designed with the lowest insurance costs allowed to meet IRS Guidelines;
22. Lower commissions paid to agents as a result of intentionally low built-in insurance costs;
23. Many similarities to Roth IRAs without IRS limits on contributions.
24. Allowed by Internal Revenue Code 72(e) and 7702.

CON’s:

1. You must qualify medically; (can be easier than qualifying for long term care insurance);
2. Four to six week approval period is typical;
3. Designed for lump sums initial optimization is needed cannot be easily added to;
4. Minimum lump sum is typically about $50,000 to optimize potential;
5. Will not accept most qualified money such as IRAs;
6. Income is available but not **guaranteed for life, like annuities;
7. Fees can typically run from 1.5% up-to 3% (these can be offset by minimum **guarantees);
8. IRS imposes 10% penalties on cash distributions before age 59.5;
9. Not FDIC Insured;
10. Requires an experienced specialist to structure correctly.