Car Insurance Home Page | Site Map
Insurance Online  look, learn, compare and buy.
The definitions contained herein are for general information only and are not designed for use in connection with the interpretation of any insurance policy or annuity policy issued through Insurance Answer Center.
Life Insurance Glossary Terms  4 A B C D E F G H I J K L M N O P Q R S T U V W Y

Modified Endowment Contract

Normally income tax is only payable on a life insurance policy when the policy is surrendered or lapsed, and then, only to the extent the amount withdrawn exceeds the premiums paid. Policy loans are not taxable when taken. Applicable law limits the amount of premium under a permanent life insurance policy that can be paid in the first 7 policy years in order for a policy to qualify for "normal" insurance income tax rules. If excess premiums are paid, the policy is classified as a Modified Endowment Contract (MEC). Taxation under a MEC is similar to taxation under an annuity. Under a MEC, the death benefit payable to the beneficiary is not subject to income tax. In addition, the cash value build-up is tax deferred. Income taxes are not due on the gain unless funds are distributed as full or partial surrenders or policy loans. For a MEC partial and full withdrawals and loans are taxed as interest first as opposed to premium first under a regular life insurance policy. In addition, taxable distributions prior to age 59-1/2 typically are subject to a 10% tax penalty. Unless specified as a MEC, however, new policies sold are not MECs but all Section 1035 Exchanges need to be reviewed to ensure a MEC is not created by the exchange.

Previous Term: Mode of Premium Payment Next Term: Money-Market Instruments

Learn More about Life Insurance Start a Life Insurance Quote
BBB OnlineVerisignPrivacy Home Page | Site Map | Insurance Information | Resource Links
Answer Financial(R) Inc. offers insurance products and services through its licensed affiliates Insurance Answer Center(R) Inc. (California License No. 0B99714), Answer Center Insurance Agency, Inc., and other affiliates. Answer Financial is not an insurance company. Insurance plans and services are from insurance companies and other licensed insurance-related providers. Not all products available in all states. Rates subject to change.
Visit Answer Financial for car insurance, home insurance, life insurance, health insurance, auto insurance, vehicle insurance, boat insurance, renters insurance and more.