What is a modified endowment agreement?
The amended Endowment Treaty is a form of life insurance, whose monetary value is growing rapidly due to large premium payments during the first seven years of politics existence. Before 1988 in the United States, some policyholders used existing tax law to gain access to their policies without paying taxes. In 1988, the law was changed to ensure the taxation of the amounts distributed from the modified endowers for any purpose other than the payment of the benefit of the benefit to the beneficiary. Part of the periodic premium paid policyholder is valid for insurance costs and a small part is valid for the administrative costs of premium maintenance. The balance is deposited in a reserved account called money value, which grows from regular posts from premium payments, as well as interest and dividends obtained. This part becomes a benefit that can be withdrawn (also reducing the benefits of death) or borrowing against the preferential interest rate. While the cash value of policy can also be pulled offOblob, either completely or in part, fees imposed by the insurance company makes it an unattractive alternative to the insurance loan.
Traditionally, insurance income is generally exempt from taxation. This applies not only to the benefits of death, but also to loans, partial selections and overall surrender. The concept could therefore lend against the money accumulated in the life insurance policy and not pay taxes for any part of the income.
In the period of high interest at the beginning of 80. Many policyholders used this situation by making large premium payments, much more than what was required to maintain their policies. What was not necessary to maintain a valid policy was stored money value, where it would grow at the prevailing rates, which often approached 20% per year. After several years of such growth they would choose without a tax on political loans and not pay them, which would benefit from high interest rates without payingIf income taxes.
In 1988, the United States Tax Code was changed to discourage this practice. It defines as a modified endowment agreement any life insurance, in which the bonus has paid at any time during the first seven years, has exceeded the instructions. These instructions were determined using "seven payment tests", which basically defines the maximum permissible bonus per year to ensure insurance costs and modest amounts of monetary value. If the total premium paid at any point exceeded the test standard over this seven years, the entire policy was defined as a modified endowment agreement. Correction measures can be taken, but only in a short period of time; If it is not accepted, the determination is irrevocable, and no subsequent measures from the policyholder or insurer can change it.
Tax law changes in 1988 did not forbid a modified foundation agreement, but successfully discouraged its use as a short -term savings vehicle by imposing income tax and sometimes SanKCE for any payouts from money other than the death benefit. Most insurance companies will monitor their life insurance policies and notify the policyholders if the insurance fails at some point in the test of seven payments and becomes a modified endowment contract.