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DEFINITION OF MODIFIED ENDOWMENT CONTRACTS (MEC)


Modified Endowment Contracts (MEC) are the result of paying too much premium into an equity indexed universal life, variable universal life , or other adjustable life policy in the first 7 years. If this amount exceeds the amount needed to provide a paid-up policy based on 7 statutorily defined level annual premiums (7-pay test), the life insurance policy becomes a MEC. The life insurance company can accurately determine whether payments into a life insurance policy run the risk of becoming a "MEC." When a policy becomes a MEC, the tax status of death benefit is unaffected and any policy build up continues to grow tax deferred. However, any withdrawal of cash values prior to the insured's age 59 ½ will be subject to a 10% penalty. Additionally, withdrawals from the policy are taxed on the LIFO tax basis meaning the cash value "last in is the first out" therefore generating an instant taxable event.

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