TEFRA, DEFRA, and TAMRA & life insurance 

Discover how a properly structured life insurance policy can provide tax-free retirement income while staying compliant with TEFRA, DEFRA, and TAMRA laws. (How I Helped a Client Build a Tax-Free Retirement Using Life Insurance — Without Triggering a MEC)

Why Retirement Planning Needs a Smarter Approach

Most retirement plans—401(k)s, IRAs, pensions—come with a catch: taxes. You either pay now or pay later. But what if there was a way to supplement your retirement income with tax-free dollars and no required minimum distributions?

That’s exactly what I helped my client Greg achieve. And the secret? A carefully structured permanent life insurance policy built with TEFRA, DEFRA, and TAMRA laws in mind.

TEFRA, DEFRA, and TAMRA: Why They Matter for Your Retirement Strategy

TEFRA: Keeps Your Policy in Check

The Tax Equity and Fiscal Responsibility Act (TEFRA) requires that life insurance premiums stay proportionate to the policy’s death benefit. This ensures the policy isn’t being used purely as a tax shelter.

DEFRA: Guards the Cash Value

The Deficit Reduction Act (DEFRA) introduced the Cash Value Accumulation Test (CVAT). This test ensures the policy’s cash value doesn’t grow disproportionately compared to its death benefit. That’s key when you’re building for long-term growth.

TAMRA: The MEC Gatekeeper

The Technical and Miscellaneous Revenue Act (TAMRA) introduced the 7-Pay Test. This determines whether a policy becomes a Modified Endowment Contract (MEC)—which changes the tax treatment of withdrawals and loans. For tax-free retirement income, avoiding MEC status is essential.

Greg’s Story: Building a Tax-Free Income Stream with IUL

Background: Greg, 47, was maxing out his 401(k) but wanted more flexibility. He was concerned about future tax rates and wanted a tax-advantaged, liquid asset that could supplement his retirement.

The Strategy: We built a LifeENSURE Indexed Universal Life (IUL) policy with:

• A death benefit large enough to stay TEFRA/DEFRA compliant.
• Premiums paid evenly over 7+ years to pass the 7-Pay Test and avoid MEC status.
• Allocation to S&P 500 index options (with downside protection) for tax-deferred growth.

Result: By age 67, Greg’s IUL is projected to allow for $25,000 in annual tax-free loans—no penalties, no RMDs, and no income reporting.

Why This Works: IUL vs. Traditional Retirement Plans

Key Takeaways for Your Financial Future

• Avoiding MEC status means withdrawals are loans, not taxable income.
• Staying TEFRA/DEFRA compliant protects the policy’s tax advantages.
• IULs are flexible and liquid—ideal for tax diversification in retirement.
• Life insurance doesn’t just protect—it builds.

FAQs

Q: What happens if my policy becomes a MEC?

A: Any withdrawals or loans may be taxed as income and may be subject to a 10% penalty if you’re under 59½.

Q: Can I change my premium schedule after starting the policy?

A: Yes, but you must be careful not to violate the 7-Pay Test if you want to avoid MEC classification.

Q: Is a life insurance retirement strategy right for everyone?

A: No—this works best for individuals with strong cash flow and long-term planning goals.

Q: What if I need to stop funding my policy early?

A: Flexibility varies by product. You may pause funding, but growth projections and policy health could be affected.

Start Planning a Tax-Free Retirement Today

Tax-Free Retirement Using Life Insurance — Without Triggering a MEC

TEFRA, DEFRA, and TAMRA aren’t just tax jargon—they’re the framework that makes life insurance one of the most powerful retirement tools available. When structured right, your policy can deliver flexibility, growth, and tax-free income.

Ready to see how it could work for you? Schedule a strategy session with The Policy Shop today.