Life

Modified Endowment Contract (MEC)

An over-funded life policy that fails the 7-pay test and loses the normal tax treatment of distributions.

When premiums paid in the first seven years exceed the 7-pay limit, the policy becomes a MEC. Distributions are then taxed last-in-first-out (gains first) and withdrawals or loans before age 59½ may carry a 10% penalty. The death benefit remains income-tax-free.