What is the purpose of a MEC?
A modified endowment contract (MEC) is a designation given to cash value life insurance contracts that have exceeded legal tax limits. When the IRS relabels your life insurance policy as an MEC, it removes the tax benefits of withdrawals you can make from the policy.
What does MEC stand for in insurance?
Any insurance plan that meets the Affordable Care Act requirement for having health coverage.
How is MEC calculated?
Calculate
. Divide the sum of the projected profits from the investment (over the item's service life) by the total investment under consideration.
How is a life insurance policy affected when it becomes a MEC?
A modified endowment contract (MEC) is a designation given to cash value life insurance contracts that have exceeded legal tax limits. When the IRS relabels your life insurance policy as an MEC, it removes the tax benefits of withdrawals you can make from the policy.
What does a MEC do?
A modified endowment contract (MEC) is the term given to a life insurance policy whose funding has exceeded federal tax law limits. These limits on the amount of cash inside a policy are in place to avoid abusing tax advantages inherent in permanent life insurance.
How do you avoid a modified endowment contract?
To avoid being declared a modified endowment contract, a life insurance policy must meet the “7-pay” test. This test calculates the annual premium a life insurance policy would need to be paid up after seven level annual premiums. (When a life insurance policy is “paid up,” no further premiums are due.)
What are the characteristics of a modified endowment contract?
A modified endowment contract (MEC) is a cash value life insurance policy that gets stripped of many tax benefits. The seven-pay test determines if the policy qualifies as an MEC. MECs ended a popular way to shelter money from taxes by borrowing from insurance policies whose cash value grew too quickly.
Is a MEC LIFO or FIFO?
Any loans or withdrawals from an MEC are taxed on a last-in-first-out basis (LIFO) instead of FIFO. Therefore, any taxable gain that comes out of the contract is reported before the nontaxable return of principal.
How does a life insurance policy become a modified endowment contract?
A modified endowment contract (MEC) happens when the IRS no longer recognizes a policy as a life insurance contract, because the total collected premiums exceed federal tax law limits. This classification seeks to combat calling something "life insurance" to avoid taxes.
What are the disadvantages of MEC?
In general, a MEC is undesirable for the owner of a life insurance policy. A MEC will see many of the tax advantages of life insurance disappear, and the money inside the MEC will become far less accessible than in a life insurance policy.
What are the characteristics of a modified endowment contract?
A modified endowment contract (MEC) is a cash value life insurance policy that gets stripped of many tax benefits. The seven-pay test determines if the policy qualifies as an MEC. MECs ended a popular way to shelter money from taxes by borrowing from insurance policies whose cash value grew too quickly.
Which of these describe the result of a modified endowment contract?
Which of these describes the result of a modified endowment contract that failed to meet the seven-pay test? Pre-death distributions are typically taxable. Failing to meet the seven-pay test results in pre-death distributions likely to become taxable.