What is a Modified Endowment Contract (MEC)?
A. A life insurance policy that does not meet the TAMRA rules becomes a MEC when the premiums paid during the first seven years of ownership exceed the amount that would be necessary to fund all future benefits with seven level annual premium payments (the 7-pay test). If a policy is deemed to be a MEC, in addition to ordinary income tax on gain, a distribution made to a non-disabled policyowner prior to age 59 ½ will also incur a 10% penalty tax on the amount disbributed that is attributable to gain. Loans, withdrawals and surrenders are considered to be distributions.
