Which of the following describes a modified endowment contract?
A modified endowment contract (MEC) is the term given to a life insurance policy whose funding has exceeded federal tax law limits. These limits on the amount of cash inside a policy are in place to avoid abusing tax advantages inherent in permanent life insurance.
What are the benefits of a modified endowment contract?
Which of the following would always be considered a Modified Endowment Contract? Single Premium Whole Life would always be a MEC as it would always fail the 7-Pay Test.
Which of the following would always be considered a modified endowment contract?
Withdrawing money from a modified endowment contract is similar to withdrawing from a non-qualified annuity, which is funded with post-tax dollars. When you take money out of your MEC, the earnings are taxable as ordinary income before you turn 59 ½ and you also incur a 10% penalty.
What is a modified endowment contract?
A modified endowment contract is a life insurance policy that has exceeded contribution limits set by the IRS. The IRS will declare a life insurance policy to be an MEC if both of the following statements are true: The policy was issued on or after June 21, 1988. The policy does not pass the “7-pay test.”
Are modified endowment death benefits taxable?
As with traditional life insurance policies, MEC death benefits are not subject to taxation. Modified endowment contracts are usually purchased by individuals who are interested in tax-sheltered, investment-rich policies, and do not intend to make pre-death policy withdrawals. 2
What is modified whole life and renewable term life insurance?
If Term Life insurance is renewable, the policyowner is purchasing the right to renew the policy without showing proof of insurability. Modified whole life policies are distinguished by premiums that are lower than typical whole life premiums during the first few years and then higher than typical thereafter.