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Subject:  Re: money market alternatives Date:  6/23/2011  4:03 PM
Author:  BruceCM Number:  69178 of 88540

What Intercst said.

These are not technically whole life insurance...they are Modified Endowwment Contracts. Any withdrawals on the policy will be 'earnings first' and will be ordinary income to the insured, along with a 10% penalty if under 59.5. Loans, borrowed amounts that are secured by the cash value of the MEC, any interest accrued on the contract, assignment of rights or benefits and dividends (except those retained by the insurer to pay premiums or purchase additional insurance) will be taxed as ordinary income.

The numbers you've shown are correct (checking them with my TI BAII Plus financial calculator). So, how does an insurance company collect $25,000 from you, put $54,500 of their capital reserves at risk, generate an average of 8.8% annualized compounded rate of return and stay in business? Answer: it doesn't. In order for this arrangement to be profitable to the insurer, they would have to be getting at least a 400 bp spread on their 'guaranteed rate of return', meaning they'd need to be consistently generating a gross return in the 13% range. This is definitely Bernie Madoff territory.

The insurance industry loves to pitch these products as, essentially, free lunches. Trust me, there is NO free lunch. There is at least one major 'gotchya' in this could be that the guaranteed average annual rate of return is 'tax equivalent yield'....but its got to be something.

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