Modified Endowment Contract (MEC)

A Modified Endowment Contract (MEC) is a life insurance policy that has been funded too quickly and violates IRS rules under the 7-pay test. Once classified as an MEC, the policy loses many tax-advantaged features of traditional life insurance. Specifically, any withdrawals or loans taken from the cash value are taxed on a LIFO (Last In, First Out) basis, meaning gains are taxed first—and may incur a 10% early withdrawal penalty if the policyholder is under age 59½.

📚 Additional Notes

Why It Matters:

• Policies structured as MECs can still serve strategic purposes—such as wealth transfer, legacy planning, or minimizing estate taxes—but they require careful planning.
• MEC classification is permanent and cannot be reversed.

🧠 Pro Tip Block

💡 Pro Tip: If cash accumulation and tax-free withdrawals are your priority, your policy must stay below the MEC threshold. This is why working with an experienced agent is critical.