A viewer wrote in with a plan. She could only put in a set amount each year, her goal was college money for her kids instead of death benefit, and she'd been told to buy the least insurance the IRS allows and pay it off in five years. Would two policies, each as small as possible, beat one? Her question became part of a video of viewer comments on the best way to fund an IUL.
First, a correction. Five years is not the shortest time the IRS allows. The test is seven years. A modified endowment contract, or MEC, is a policy funded too fast to keep its tax-free loans, and the MEC limit is the most you can pay in over that seven-year test. If your limit is $10,000 a year, you can pay $10,000 for the full seven years and put $70,000 in. Five years is a good balance between expenses and growth, but it isn't the fastest. You could even put it all in during year one. That would win if we knew what the index will do, and we don't.
The least insurance is the MEC limit, and that's fine. A policy built that way works well for what she described.
Now the two-policy question. With a traditional design, where the agent's commission isn't reduced, two policies is a fair way to go. A split design works differently. It blends in term insurance, which is coverage for a set period with no cash value. Some carriers allow a ten-to-one split. You buy a $100,000 base face amount, which is the permanent insurance the commission is paid on, and blend in ten times as much term, up to $1,000,000. The term pays no commission. The total death benefit is $1.1 million, and one policy like that can carry a $50,000-a-year MEC limit while the agent earns commission on only the $100,000 base.
Most carriers set the minimum base at $100,000. Split $50,000 into two policies of $25,000 and each one needs its own $100,000 base. That doubles the base commission. It's less efficient than one policy.
It can still make sense. If both parents need coverage, two policies puts coverage on both. And because I use a reduced-commission design, the extra commission is probably small. When I meet with someone I show them $20,000 a year in one policy next to $10,000 in two, with the savings in dollars. I want you to decide knowing what each choice costs, instead of me deciding for you by leaving something out.
Illustrations are projections and not promises, so compare the cash value in years one and two before you compare anything else. Ask for both versions side by side, one policy and then two, before you sign.