New answer on: What Is A Modified Endowment Life Insurance?

By: David Racich

David Racich — Thu, 27 Jun 2013 13:35:15 +0000

After June 21, 1988, a modified endowment (life insurance) contract (MEC) set new rules for single deposits into permanent cash value life insurance under TAMRA. After that date, a MEC cash values were treated like an annuity for income tax purposes, but death benefit proceeds (for most scenarios) remained tax free. A new seven pay test was introduced to restrict the over funding of premium in the early years of a policy. Any violations of this rule also creates a MEC.

By: Peggy Mace

Peggy Mace — Thu, 27 Jun 2013 13:12:31 +0000

Modified Endowment Life Insurance is life insurance that builds up cash value so rapidly that it loses favorable tax treatment by the IRS. If any withdrawals or loans are taken from a Modified Endowment Contract (MEC), income tax is charged, and a 10% penalty is usually charged if taken out before age 59.5. This type of contract is best for people who do not foresee a need to borrow from their life insurance while they are alive. Instead they are using it to transfer wealth.