A special class of life insurance. Funds withdrawn from a MEC policy in the form of policy loans, partial surrenders, assignments, and pledges are treated as gross income to the recipient and therefore subject to taxation.
Also known as MECs, these are life insurance policies that are considered to be investments by the Internal Revenue Service because the ratio of cash value to death benefit is higher than in typical life insurance policies. As a result, unlike with non-MEC policies, policy loans and surrenders of cash value are generally taxable as income. Additionally, distributions prior to age 59 1/2 are subject to a 10% surcharge tax on any gains. Death benefits, however, are received by beneficiaries income tax-free, the same as non-MEC policies.
(All) If a policy fails to satisfy the “seven pay test” it no longer meets the definition of life insurance and the inside build-up of the policy becomes taxable as income to the policyholder. Basically, if there is too much put in the IRS views the contract as other than life insurance. The test is that if the accumulated amount paid into the contract in the first seven years exceeds the amount that would have been paid under a paid-up seven pay life policy, it is a MEC.
Life insurance in which funds such as policy loans, assignments, pledges, and partial surrenders are considered gross income and subject to income tax.
A category of life insurance contract created by legislation passed by Congress in 1988. A policy becomes a Modified Endowment Contract (MEC) when premiums are paid into the contract in excess of the so-called seven-pay test. The purpose of the law is to discourage policyholders from making very large premium payments during the first seven years of the contract in order to create a "paid-up" policy. When a contract becomes an MEC, a policy loan may be taxable and subject to penalties. Partial surrenders of MECs are treated as first being a taxable distribution of earnings rather than a non-taxable return of premium. Taxable distributions from a MEC taken prior to the owner's age 59-1/2 may also be subject to an Internal Revenue Code penalty of 10%. oney Market - The market for borrowing and lending large amounts of short-term funds. Money-market instruments include notes, negotiable certificates of deposit, Treasury bills, and the like.
Life insurance policies deemed "investment-oriented" under TAMRA '88. Distributions (loans or surrenders) taken from these policies while the insured is living are taxed as gain-out-first rather than tax basis-out-first. Also, distributions taken before age 59½ are subject to an additional 10% surcharge tax on any gains. Death benefits are treated the same as non-MEC contracts.
