MEC and the 7-Pay Test: The Rule That Changes Policy Tax Treatment
What modified endowment contract status means, how the 7-pay test works, and why policy design discipline matters.
What Changes Under MEC Status
- Death benefit tax treatment under §101 generally remains, but distributions become less favorable.
- Loans and withdrawals may be taxed on gain-first basis and can incur penalties before age thresholds.
- Once a policy becomes MEC, status generally persists.
How Policies Accidentally MEC
- Aggressive funding without monitoring guideline limits.
- Material contract changes without retesting implications.
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