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However, annuities are not perfect. For instance, if you should pass away while your annuity is accumulating, all deferred taxes on your growth suddenly become due. Annuities with substantial growth could be reduced significantly, and your children and grandchildren could end up with a fraction of your annuity's value after taxes. For retirement savers looking to preserve a little more wealth for their family, there may be a solution: a type of life insurance policy known as a Modified Endowment Contract (MEC). In financial circles, MECs are often compared to annuities because of their similarities. In fact, MECs are technically life insurance contracts that have many of the benefits of accumulation found in annuities... but if anything happens to you, your loved ones will usually receive more than your initial premium, not less.
The same insurance companies that issue annuities also underwrite Modified Endowment Contracts. MECs are very similar to annuities in terms of tax-deferred accumulation of your initial premium. However, the tax code is not very favorable, particularly if the owner passes away during the annuity's accumulation stage. If that happens, all deferred income taxes on growth become due. MECs are able to overcome this by including an insurance "rider" in the contract, designed to pass the entire account value to your beneficiaries income tax-free. While specific features will vary by company, MECs offer several distinct advantages over deferred annuities and other wealth-accumulation vehicles:
MECs can provide a retirement income for you, while preserving your legacy for your loved ones.
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