IRA Rescue Using IUL Violates MEC Rules
I don’t know if this email will be the death nail for IRA rescue using IUL (www.stopirarescue.com), but I sure hope it is.
Most abusive sale in the industry today! What is IRA rescue? It’s when you tell someone 60 or older (although I’ve seen illustrations with 55-59 year old’s) to remove money from their IRA (or qualified plan), pay taxes on it, and fund an IUL (Indexed Universal Life) policy.
Why would anyone in their right mind do this? Well, they wouldn’t, but there are a lot of ignorant or crooked agents selling it, and several scum bag IMOs pushing it.
The sale is that IRAs are tax-hostile and it would be better to move money from a taxable IRA so it can grow tax-free and come out tax-free from an IUL.
Why does IRA rescue violate the MEC rules? The only way IRA rescue works (actually it will never work from a mathematical standpoint) is if you get money in the policy quickly (keep in mind these are older clients who don’t have 20 years for accumulation).
Most IRA rescue illustrations are funded in 3 years. If you know anything about life insurance, you will know that funding over three years causes MEC problems. In order for the policy to not be a MEC, you have to have a very high initial death benefit. The ideal funding of a cash value life policy is over 7-years (aka, the seven-year MEC test).
To see an example of an IRA Rescue illustration and what’s wrong with it, click on the following link:
What the scum that are pushing IRA rescue do is lower the death benefit significantly in year four (in a way that would normally violate the MEC rules) and they tell the client the policy is not a MEC.
How can they get away with this sales tactic? Let me take a few quotes from the MN National VP of Sales, Ben Roth when talking about changing the death benefit from increasing to level in the context of an IRA rescue sale:
We treat these scenarios as a material change…….which immediately creates a “new contract” under section 7702 and starts a new 7-pay testing period.
The above sounds good doesn’t it? If there is a material change an insurance company can issue a new contract and re-run the MEC 7-pay test.
What’s the problem? On its face, intentionally creating a material change to get around the MEC rules doesn’t pass the small test. I contacted one of the foremost experts in the country (an attorney) who knows the material change laws and told him about IRA rescue using IUL. He told me emphatically that the structure was a violation of the MEC rules.
He then emailed a footnote from the Congressional record that dealt with this very issue (people trying to use the material change rule to get around the MEC guidelines).
Footnote 166 on page 479 of the House Report on TAMRA says, “This rule [the section 7702A(c)(2)(A) reduction in benefits rule] applies to any reduction in death benefits in the first 7 contract years whether or not the reduction is considered an exchange of the original contract for a new contract [i.e., a material change].”
He said Congress knew that people would try to use the material change rules to get around policies becoming a MEC and Congress didn’t want that to happen.
What does all this mean? It means that the hundreds, if not thousands, of IRA rescue policies that have been sold over the last several years will be violating the MEC rules if they lower the death benefit in year four as the agents have most certainly illustrated.
In practical terms, it means that the insurance agents who sold these polices better make sure their E&O is paid up and they should hope the IMO that told them to go pitch this is still in business and is also able to be sued when the client figures out they’ve been screwed.
As for any insurance company that knew their policies were being sold in an IRA rescue case, they better set aside some money for the lawsuits that will most certainly ensue.
It is my belief that a law firm that specializes in suing insurance agents and insurance companies will file massive class action lawsuits over these types of sales.
Not limited to IRA rescue cases
This issue is not limited to IRA rescue cases. I had a MN Life illustration come across my desk a few weeks ago that was a three-pay for a 70-year old where the death benefit was dropped just like an IRA rescue case. It wasn’t for an IRA rescue, it was just your classic abusive life insurance sale to someone on the theory that IUL would work as a good retirement tool.
Some in the industry see dropping of the death benefit in an IRA rescue sale and whether it violates the MEC rules as an unanswered question or a gray area. I do not.
In my opinion…..There is no place in this business for IRA rescue using cash value life insurance.
There is no place in this business for insurance agents or IMOs peddling this garbage.
Finally, insurance companies that allow their policies in such structures should take a look in the mirror and decide if they are going to lift up this industry from an ethical/professional point of view or if they are going to turn a blind eye in the name of profit (and hope they don’t get sued).
Roccy DeFrancesco, JD