Getting the Most Out of Your MPI Investment

By Vaibhavi On Mar 8, 2022

In essence, an MPI Secure Compound Interest Account is a repackaged version of indexed universal life (IUL) insurance coverage. IULs are complex insurance products that combine life insurance with some type of investment product, as well as guarantees, costs, and rules. They are available in a variety of forms.

What Is an Mpi (Maximum Premium Indexing) Account, and How Does It Work?

In essence, an MPI Secure Compound Interest Account is a repackaged version of indexed universal life (IUL) insurance coverage.

IULs are sophisticated insurance policies that combine life insurance with some sort of investment product, as well as guarantees, charges, and restrictions. They are available in a variety of forms.

Typically, the increase of your cash value is related to the performance of some underlying index when you purchase one of these insurance products. In the case of MPIs, the value is determined by the performance of the S&P 500 index.

The MPI account is meant to provide a steady stream of income during retirement. During retirement, the owner of the investment will take a distribution from the cash value in order to fund living expenses. While the remaining investment will remain in place, it will be utilised to pay for the life insurance payments and expenditures as they arise.

The Fundamentals of IULs

In order to proceed, it’s vital to grasp the fundamentals of IULs before moving on. Here are some of the most often seen phrases and functions associated with an indexed universal life insurance policy. It’s more straightforward to think of an IUL as a car, with all of the moving elements contained within the vehicle’s interior.

Insurance Policy for One’s Life

Let us begin with the fundamentals. It goes without saying that, because an IUL is a life insurance vehicle, a life insurance policy is one of the vehicle’s most important components. This life insurance policy, like any other life insurance policy, must be paid for with premiums, exactly like any other. These rates may increase on an annual basis, depending on the insurance coverage.

The ultimate aim is for the entire IUL to be able to self-fund the premiums over time using the cash value, although this may not be achieved for years, if ever. Furthermore, because it is life insurance, you will be required to submit to a medical examination in order to be covered, and your premium rate will be determined by your overall health. People who are younger and healthier will pay less for their insurance.

Cash Monetary Value

This represents the amount of cash that is now accessible in the account, as the name implies. This is essentially the amount of money you will have if you walk away from the plan and do not renew it.

Account Value

This is the amount of money in your account that is “increasing” as a result of dividend credits. This is also the amount that is utilised to pay for various fees, premiums, and other expenses.

Fees for Surrender

It is possible that you will be charged surrender costs if you decide to terminate the plan early. This might be a big cost, depending on the plan. There is a common fee structure that starts at 10% in year one and decreases by 1% per year, ending with 0% in year 10. According to MPI, the surrender charge remains in effect until the fourteenth year.

Credit for Dividends

Depending on the performance of the underlying index and the conditions of your contract, you will get this amount in credit to your account every year (participation rate and cap and floor – see below). It is not the comeback of the stock market, as many people believe. The number is assigned by your insurance carrier in accordance with the conditions of your policy.

You don’t actually invest in anything when you use an IUL – it’s just a way to protect your assets.

The insurance contract is still in effect. In addition, according to the terms of the agreement, the insurance company credits you with a dividend that is applied to your cash value.

For example, the dividend rate of Mass Mutual for 2020 was 6.20 percent.

Involvement Ratio (percentage of people who participate)

You get to participate in the gains and losses of an index based on how much of it you have in common with other people. In the case of MPI, the S&P 500 index is used. Example: A 100 percent participation rate indicates that if the S&P 500 is up 10%, you will be credited with 10% of that increase.

A participation rate of 80% means that if the S&P500 is up 10%, you will be up 8% on the stock market. Participants in typical IULs range from 50 percent to 150 percent of the total number of participants.

Cap and Floor

There will be a maximum and a minimum quantity of the index that you will receive. If there is a cap of 10%, even if the S&P500 increases by 20%, the most you will receive is 10% of the increase in the index. In addition, MPI advertises a floor of 0 percent.

In other words, if the S&P500 ever goes negative, you simply maintain your 0 percent position. Remember that a 0 percent floor does not rule out the possibility of losing money; it only means that you will not receive a dividend credit for that year. Despite this, you will still be responsible for your premiums and expenses.

Loans

IULs are a type of loan that is secured by the cash value in your account. This is marketed by MPI as a RELOCTM (Retirement Equity Line of CreditTM), which stands for Retirement Equity Line of Credit. It has an interest rate, which might vary according on the plan, however MPI offers a rate of 4-6 percent per year for their plan, which is competitive. You can utilise this loan to have access to the cash worth of your account without having to pay taxes on it.

If you want to “supercharge” your returns, MPI recommends that you take this loan.

In layman’s terms, this means that you are borrowing money from your IUL and using that money to pay your insurance premiums. This raises the cash value of your life insurance policy, which, in the best case scenario, generates a dividend.

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You can benefit from an arbitrage by borrowing at 4 percent and collecting a 7 percent dividend, signalling that you are 3 percent ahead of the competition. That may or may not be the case at all times.

Failure to Implement Policy –

When the cash value of a policy reaches zero and a premium payment or charge is not made, the policy expires, or is cancelled. When a policy expires, you may keep it from lapse by either putting your own money into the plan (which you can do up front, or you can spread it over several years), or by self-funding.

Most insurance brokers will tell you that the aim is to self fund – that is, to collect a large enough amount of premium so that the cash value rises faster than the amount of premiums payable each month.

Mpis Are Marketed as Having a Variety of Advantages.

The marketing literature for MPI emphasises that the company’s features and advantages are slightly different from those of any other life insurance or annuity products now available on the market. In fact, it claims that it is a better alternative than investing in a Roth, traditional IRA, or retirement plan (k).

First and foremost, MPI accounts, like many IUL plans, have a 0 percent floor. In other words, you will never experience a loss on your assets. However, it’s crucial to remember that even with the 0 percent floor, you might still end up losing money on your MPI account once all of the premiums, fees, and loan interest costs have been included into the calculations.

Second, there are no age limitations or penalties for withdrawing money from an MPI. According to SunCor Financial, this makes them an excellent choice for early retirees. However, in order to obtain your funds, you must take out a loan – therefore, while there are no age limitations, there is a debt involved in the process.

The reason for this is because you are not permitted to remove more cash than your basis without incurring tax consequences. Besides that, cash withdrawals depreciate the value of the asset and diminish “compounding,” or future credits. As a result, the vast majority would advocate taking out a loan.

Plan owners also have access to RELOC, which is an open line of credit that leverages your cash worth as collateral to purchase investments on margin in order to “accelerate returns.” It is possible to begin investing with borrowed cash after two years of making your monthly premium payments. However, MPI recommends you to utilise this loan to superfund your premiums, which may result in a possible increase in return on your investment.

MPI Costs And Risks

An MPI’s insurance costs are “front-loaded,” meaning they are expensive for the first few years of the policy. If you decide the MPI isn’t for you, you will likely lose money. Short-term investing returns are likely to be negative. The surrender charge goes gone in year 14, so it may be a while before you see positive returns.

Also, during Year 3 of your contract, the MPI introduces a type of purchasing on margin (or leverage). The MPI Match Program allows you to borrow against your cash worth at 4% – 6% interest. SunCor Financial believes that the MPI Match Program can improve compounded returns by up to 15%.

The arithmetic isn’t as simple as it sounds. It assumes a rate of return versus your loan payment. If the S&P 500 tanked, you’d still repay the debt, but you’d get a smaller dividend credit. Because the cash value is reduced, the insurance may expire.

Early insurance lapse is common, especially if you don’t pay a significant enough premium upfront. Then you lose your money if the insurance expires.

If your insurance premiums rise, your coverage may lapse (especially as you get older). Because your IUL’s insurance is renewable, you’ll face term renewals and price hikes every year or two. It doesn’t matter when you’re young and healthy. But as you age, the premiums can skyrocket. Combined with poor growth, your insurance may not be able to self-fund.

Conclusions

Let’s be clear: MPI isn’t a scam. But we think it’s also not clear what it is, how it works, and the risks or scenarios where it may fail.

We want community members to understand financial products so they can make educated portfolio selections. Don’t just watch a TikTok or Instagram Reel on a financial product and assume it’s perfect for you. Do your homework and understand why.

Our in-college and after-college investing guidelines can help you optimise returns and avoid the greatest investment traps. See also The Best Order Of Operations For Retirement Savings.