Cash Value Growth: Both regular life insurance and MECs offer tax-deferred growth of cash value, maintaining this important advantage.
Withdrawals and Distributions: This is where the biggest difference lies. Regular life insurance follows FIFO (First In, First Out) taxation, meaning you can withdraw your basis (premiums paid) tax-free first. MECs follow LIFO (Last In, First Out) taxation, meaning any gains are taxed first as ordinary income.
Policy Loans: Regular life insurance allows tax-free loans against cash value. With MECs, loans are treated as taxable distributions if there are gains in the policy.
Early Distribution Penalties: MECs are subject to a 10% penalty on distributions before age 59½, similar to retirement accounts.
Death Benefits: Both regular life insurance and MECs provide income tax-free death benefits to beneficiaries.
1035 Exchanges: While regular life insurance can be exchanged for any qualifying policy, MECs can only be exchanged for other MECs, making the designation permanent2.
