Whats a Modified Endowment Contract (MEC) and why should I care?
When you’re considering tax issues related to whole life insurance, you should be aware that with certain policies and situations, the tax advantages are not the same as those discussed in other parts of this FAQ. Under rules of the Internal Revenue Service (IRS), certain life insurance policies may be classified as a Modified Endowment Contract (MEC). Here’s why you should know about MECs. In the 1980s, many people looking for ways to grow large sums of money with minimal taxes bought whole life insurance policies. These investors were more interested in accumulating wealth through the tax advantages of whole life insurance than in the death benefit. As a result, Congress stepped in and put limits on how much money can be contributed to a whole life insurance policy at the outset to ensure that it did not become more of an investment vehicle than an insurance policy. Under the IRS rules, if the premiums you pay for your policy exceed a limit set by law (known as the “seven-pay limit”)
