Modified Endowment Contract

A Modified Endowment Contract (MEC) is a particular classification of life insurance policy, relevant under the U.S. tax code. Key aspects include:

• Premium Limits Exceeded: Occurs when a policy's premiums surpass limits defined by the Internal Revenue Code.
• Impact on IUL Policies: When an Indexed Universal Life (IUL) policy becomes an MEC, it forfeits certain tax benefits.

Tax Implications:

• "Last In, First Out" Taxation: Withdrawals or loans are taxed with gains being taxed first, followed by the principal.
• Potential Penalty Tax: Withdrawals before age 59½ may incur a 10% penalty tax.

For IUL policyholders, vigilant monitoring of premium payments is crucial to prevent the policy from transforming into a MEC, thus preserving its tax advantages.