Blog #29 – Modified Endowment Contract: Should You Be Concerned?

Anyone who has any type of banking policy has probably come across the term Modified Endowment Contract, or MEC. You may have noticed a portion of your whole life policy illustration or contract stipulating whether or not it is a MEC. You may have even seen numbers indicating the additional amount of Paid-Up Additions that can be added to your contract before it turns into a MEC. What does it mean and should you be concerned?

Here is a brief history. Legislation enacted in 1988, created the MEC as a way of limiting the amount of cash allowed into a cash value life insurance contract and controlling its use as a tax shelter. The legislation created what is known as the 7-Pay Test which is the maximum premium amount based on the assumed cash values those premiums would create relative to the death benefit on the contract. That MEC line is the amount needed to make the contract guaranteed paid-up within seven years.

A common mistake people make is assuming that you have nothing to worry about after seven years. This is wrong since any time the contract undergoes a material change the 7-Pay Test clock is reset. Since in a banking policy you are continually adding Paid-Up Additions, the 7-Pay Test is continually resetting and the contract may become a MEC in the future, if for example, you receive higher dividends than expected or you reduce the death benefit by the use of withdrawals.

The way to increase the 7-Pay Test with minimal cost is to blend a banking policy with a term-like rider that increases the amount of extra Paid-Up Additions that can be accommodated inside the policy.

If you are working with a competent agent, you should not be concerned with your policy suddenly becoming a MEC and having to pay taxes. If the 7-Pay Test is violated, you will have 60 days after the end of the contract year to reverse the situation by taking the extra money back out, and all insurance companies give plenty of advanced notice of any reclassification as a MEC.

If you would like to learn how you can grow a substantial amount of cash that you have access to at any time without penalties, is unrelated to the stock market, and will generate income that is not included in your tax return, visit our website at or feel free to email us your questions at or call us toll-free at 1-844-443-8422.

Isis B. Palicio, LUTCF, MBA
Pedro A. Palicio, MBA, Ph.D.
Infinite Banking Concepts® Authorized Practitioners

We are experts in designing high cash value dividend-paying whole life policies.



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