Does MEC status affect the contracts status as a life insurance contract?
No. As long as the contract otherwise satisfies section 7702 of the Code, MEC status does not alter the life insurance contract itself or have any effect on the tax-free death benefit under Section 101(a) of the Internal Revenue Code. MEC status only affects the income tax consequences of lifetime distributions from the life insurance contract. This means that, unless lifetime distributions or policy loans are taken from the policy, there are no adverse consequences to MEC status. In some planning situations, therefore, where no loans or withdrawals are contemplated and rapid funding is desired, policies are intentionally funded as MECs. More commonly, policies are funded to avoid MEC status to preserve flexibility and favorable tax consequences regarding future lifetime distributions or policy loans.
