I’ve seen several of these come across my desk in the last few months. Each one makes me sick to my stomach. All the ones I’ve seen are on MN life paper and are being pushed by a handful of IMOs (although I see one that came directly from the MN Life home office).
Let’s look at the typical bogus example that is forwarded to me for review by advisors wondering if they are doing the right thing for their clients by recommending IRA rescue.
Client: Age 58, premium $66,000 years 1-3, initial death benefit $972,000, drop death benefit in year five to $255,769.
To download part of the actual illustration, click here.
Clearly dropping the death benefit from $1,102,753 in year four to $225,769 would by any normal standards violate the MEC guidelines. MN life however says it doesn’t because of the “material change” rules.
I, as well as other insurance companies and some of the attorneys in the country who know this subject matter, think this does violate the MEC rules.
The question for advisors is whether you want to run the risk that MN life is wrong. Good luck if you do. Maybe I’ll see you on the other side of a lawsuit sometime soon.
Roccy DeFrancesco, JD
The finances of IRA Rescue do NOT work regardless of the MEC issue
I’m not sure what’s worse, pushing the envelope with the MEC issue or pushing a concept that is fatally flawed when you look at the finances of the structure.
Simply put, it is mathematically impossible for IRA rescue using life insurance to work. I’ve had dozens of illustrations come across my desk and NONE of them were better for the client than if they had just left their money in the IRA and taken taxable distributions in retirement.
Think about it…does it make sense to tell someone 60, 65, etc. to take massive lump sum distributions from their IRA to fund cash value life because the client will be able to borrow more from the policy than taking systematic distributions from the IRA in retirement? Just saying it sounds silly.
Even when you could put forth an abusive IUL illustration with a 4% positive loan arbitrage it didn’t work and now with the new AG-49 regulation that limit the ROR and loans to a 1% positive loan arbitrage, the numbers look even worse.
Finally, it’s tough to do an apples-to-apples comparison with an IRA rescue illustration because every one that comes across my desk violates the MEC rules.