Money Worth Progress: Each common life insurance coverage and MECs provide tax-deferred development of money worth, sustaining this vital benefit.
Withdrawals and Distributions: That is the place the largest distinction lies. Common life insurance coverage follows FIFO (First In, First Out) taxation, that means you’ll be able to withdraw your foundation (premiums paid) tax-free first. MECs comply with LIFO (Final In, First Out) taxation, that means any beneficial properties are taxed first as unusual revenue.
Coverage Loans: Common life insurance coverage permits tax-free loans in opposition to money worth. With MECs, loans are handled as taxable distributions if there are beneficial properties within the coverage.
Early Distribution Penalties: MECs are topic to a ten% penalty on distributions earlier than age 59½, just like retirement accounts.
Loss of life Advantages: Each common life insurance coverage and MECs present revenue tax-free dying advantages to beneficiaries.
1035 Exchanges: Whereas common life insurance coverage will be exchanged for any qualifying coverage, MECs can solely be exchanged for different MECs, making the designation everlasting2.