MODIFIED ENDOWMENT CONTRACT DEFINITION:

As I promised here is a detailed explanation of a M.E.C on a life Insurance Contract.
Modified Endowment Contract Explanation.
The Technical and Miscellaneous Revenue Act (TAMRA) is a law that was established to determine the tax consequences of income received from
a life insurance policy during the lifetime of the insured. TAMRA makes a distinction, based upon the amount of premium paid, between a policy
purchased primarily for a death benefit from one that was purchased primarily as an investment. TAMRA establishes an annual premium limit for 7
years, called the 7-pay test. A policy that is funded in excess of the 7-pay premium limits is considered to be a "Modified Endowment Contract"
(MEC).
Events such as timing of premium payments and policy changes play a role. Your clients should be aware that the insurance
proceeds payable to the beneficiary upon death of the insured are income-tax free and policy cash values will grow on an income-tax deferred
basis. However:
1. Any cash distributions, withdrawals, assignments or loans made at any time during the life of the policy (other than death) will be included in
the taxable income to the extent of the taxable gain at the time of the transaction. Taxable gain is the excess of the policy value over the sum of
the premiums paid less withdrawals (cost basis).
2. Such distributions will also be subject to a 10% penalty tax on amounts included as income unless you have attained age 591/2, become
disabled, or you arrange for a distribution in substantially equal payments over your life expectancy. If the owner is a non-natural entity, ( e.g.
corporation or trust, etc), such proceeds are always subject to the 10% penalty.