Is a modified endowment contract better than an annuity?

Question: How does a modified endowment contract compare to an annuity?

Answer: For those readers who are unfamiliar with Modified Endowment Contracts (MEC), Congress created them when it passed the Technical and Miscellaneous Revenue

Act of 1988 (TAMRA). MECs are similar to deferred annuities in that they both grow tax deferred but MECs are more tax efficient than annuities because they have a tax free death benefit. Additionally, if you compare the interest you can earn from MECs, the more competitive contracts will offer the opportunity to earn much higher interest the most deferred or indexed annuities.

Historically, people who purchased MECs were primarily looking for a long-term tax efficient wealth transfer strategy for their heirs. However, recently some highly rated insurance companies have started offering

MECs that have no upfront load and no back end surrender charges. Suddenly people are looking at these vehicles as an alternative to other liquid conservative assets like money market and short-term bonds. The right MEC can provide not only safety and liquidity but very attractive risk adjusted returns.

The aforementioned MECs which provide the benefits of safety, liquidity, relatively high growth potential and a tax-free death benefit are also offering at no additional cost a significant long term care benefit in the event that the insured is unable to perform two out of the six activities of daily living or suffers from a cognitive impairment. For many this is a more palatable way of planning for potential long-term care needs than a traditional LTC policy. So if you were wary of annuities because you didn’t want to make a long-term commitment and are looking for a safe place for your money, you should investigate the top modified endowment contracts.