A Modified Endowment Contract (MEC) is simply a permanent life insurance policy gone awry. In layman’s terms, a MEC is a life insurance policy into which the policy-owner put too much money into it too fast. This results in any distribution taken from the policy (including loans) are taxed as ordinary income. If you are younger than 59 1/2 when you take the distribution, tack on a 10% penalty courtesy of the IRS. Distributions include collateral assignments, cash dividends, dividends applied for any purpose other than to reduce premiums on the same contract, full and partial surrenders and account withdrawals.
How do you MEC a life insurance policy? Answer: by paying too much into a policy over the first seven years. This amount is determined by the IRS, who sets the maximum amount of premium that can be paid into a policy for the first seven years from the date of issue. Also, you can’t avoid MEC by simply paying less in later years. Once you exceed this limit, it’s like jumping off a bridge: you can’t undo it!
The best way to avoid MECing your life insurance policy is to have your initial life insurance illustration run to avoid it. If your agent is competent, he or she will take care of that for you – but it’s worth the question so that you’re not surprised later. Life insurance software will automatically run your illustration to avoid MEC. Yes, it’s that simple. Want more info? Go to: http://www.thriftytermquote.com/