What is the effect of a MEC (Modified Endowment Contract)?
If your policy is a MEC (Modified Endowment Contract) the tax treatment of any death benefit provided under the contract will still qualify for income tax free treatment. However, you may be subject to additional taxes and penalties on any distributions from your policy during the lifetime of the insured. Any distribution from a policy that is a MEC will be taxed on an “income-first” basis. Distributions for this purpose include a loan (including any increase in the loan amount to pay interest on an existing loan or an assignment or a pledge to secure a loan) or withdrawal. Any such distributions will be considered taxable income to you to the extent there is gain in the policy at the time of distribution. That is, the distribution will be includible in income up to the amount your account value exceeds your basis in the policy. A 10% penalty tax also will apply to the taxable portion of most pre-age 59 1/2 distributions from a policy that is a Modified Endowment Contract.
