Next question here, the two main policy Clements. Maybe define the MEC, what is MEC?
The MEC limit is really something that came out in the eighties from the IRS. That prior to the eighties, before the 7702 rule, you’ll hear that also is that there was no limit as far as the amount of funds you could put into a policy. The IRS put a cap on it and it’s really just a calculation based on the person’s age, gender, and death benefit. And it’s a ratio basically how much death benefit is needed. For that policy amount and it’s a seven year. And so they’re saying over that seven years, this is how much, the maximum amount that one can put into a policy with this death benefit and still be called and be considered a insurance policy versus prior to that law, someone could just put in a dollar premium and then put a $20,000 of paid up additions or the cash value part of that, and still be considered insurance. IRS put a limit on that. So that’s the big IRS limit that we do not want to mess around with in that sense. And it is a seven year lock so that’s where it may be called a seven pay lock or a MEC limit. Those are all basically the same.
Yeah so I’ll explain it a little bit different. I don’t know if this is the true story. All these politicians are making these laws to find ways not to pay taxes and they created this life insurance, but then they start to stuck all their money away. It’s like insurance policies, but that’s where the equipment strengths of this stuff at the whole thing.
The second limit and this is company derived. It’s the paid up additions limit so you have that the MEC limit and then what you hear is the paid-up additions limit. Two main companies we use, those limitations usually is one company is 10 times base. So if for base premium say at $10,000, you could put up to 10 times that in paid up additions which is basically a cash dump. So you could put in $10,000 of base premium PUA, you could put in another a hundred thousand and PUAs and that’s the company limit. Another company we use a lot it’s the 10-90. It’s 10%. It’s not really 10 times so it’s the 10-90 split is the max. If you have $10,000 of a base premium, you can put in up to 90,000 in PUAs. So it’s slightly less, but again, those are policy or insurance company limits. And then there is some flexibility. And that’s what you mentioned or Nash mentioned earlier that we’re just testing that out because essentially if you have a longer funded period that you’re able to maybe put in a little bit more and the companies have allowed you to do. Granted, you’re still locked into the target amount.
For Nash’s example, 116,000 for 10 years, that’s 1.116 mil total of funds who wants to put into the policy. If he puts in 150,000 year one, which is under the MEC limit, he’s not going to be able to continue to do that for all 10 years. So the maximum would still be 1.116 mil. So in those later years, he’ll be putting in less why he’s doing that would be because you want to front load the policy, have the compounded dividends start earnings earlier and it’ll have a greater effect down the road. So that’s one of the benefits to it.