Can a policy become a MEC after 7 years?

Asked by: Lolita Funk  |  Last update: February 11, 2022
Score: 4.1/5 (74 votes)

The seven-pay test helps the IRS determine whether your life insurance policy will be converted into an MEC. It compares the total premiums you paid in the first seven years of the policy with what you'd need to pay it in full. If your payments exceed what's needed, your policy becomes recognized as an MEC.

Can a policy MEC after 7 years?

Material Change: MEC Violation after 7 Years

Both whole life insurance and universal life insurance policies can violate the MEC test and become Modified Endowment Contracts in policy years 8+. This can happen whenever the policy undergoes a material change.

What causes a life insurance policy to become a MEC?

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.

Does a MEC automatically lapse?

Once a flexible premium cash value life insurance policy becomes classified as an MEC, it immediately loses its former tax benefits, and this transformation is irreversible. A MEC cannot become a life insurance policy ever again, regardless of circumstances.

How long does a MEC last?

This limitation expires after seven years, as long as no material changes, such as an increase in death benefit, occur. Any material change will effectively restart the seven-year test.

Modified Endowment Contract (MEC) - Explained

41 related questions found

Can a whole life policy MEC?

It simply offers the basic death benefit protection. But life insurance policies that do offer cash accumulation in addition to the death benefit, such as whole life insurance, universal life insurance, and other types of permanent life insurance, may be subject to the MEC rule.

What is the 7 pay test for life insurance?

The 7-pay premium limit is a level annual amount of money that can be put into a cash value life insurance policy during each of the first seven policy years (or the first seven years after a material change in the policy, e.g. an increase in the face amount).

Can you reverse a MEC?

If you accidentally overfund your policy's cash value, you may have the chance to refund the premium payments. After that, a policy's MEC status cannot be reversed.

What is a 7-pay premium?

7-Pay Life Insurance is a type of Limited Pay Life Insurance (typically Whole Life Insurance) that requires payments over 7 annual installments. Seven-Pay Life Insurance can be used as an additional source of income for the family or to help cover monthly expenses in the event of your death.

Can an annuity become a MEC?

Essentially a life insurance contract that becomes a MEC is treated as a nonqualified annuity by the IRS for taxation purposes prior to the insured persons passing. A death claim can still be tax-free even if the policy payout out the death claim is a MEC.

Is a modified endowment contract bad?

If your main financial goal is to pass on the most tax-free wealth possible to your family, a Modified Endowment Contract can be a great estate planning tool. Compared to other savings vehicles like CDs or money market accounts, MECs typically earn a higher interest rate.

What does MEC mean in insurance?

Minimum Essential Coverage (MEC) Any insurance plan that meets the Affordable Care Act requirement for having health coverage.

Which of the following is not a group typically recognized as eligible for group insurance?

Which of the following is NOT an eligible group to obtain group life insurance? Group life insurance is limited to employer groups, multiple employer trusts, labor unions, group credit life insurance, and association plans.

Is a TFRA life insurance?

TEFRA: The Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982 provided a statutory definition of life insurance for flexible premium (i.e., Universal Life) products that limited the amount of premium per dollar of death benefit and required at least a minimum amount of pure risk coverage in order to be treated as ...

What is considered a limited pay life policy?

Limited pay life insurance is a type of whole life insurance that allows you to prepay for the entire cost of your coverage for a set number of years. ... You may pay for your premiums monthly, quarterly, semi-annually, or annually if you select to do so in a restricted time period—typically 10, 15, or 20 years.

How is 7 pay premium calculated?

The lowest face amount during the first seven-year period (in this case, $1 million) determines the 7-pay test premium. This also applies to any other seven-year period initiated by a material change. Face amount reductions during a seven-year period are deemed retroactive to the start of the period.

Is Iul good for retirement?

Indexed universal life insurance (or IUL) can be good for retirement because it protects your savings from stock market crashes. It also has the potential to earn more than a whole life insurance policy.

What is modified life insurance?

Modified life insurance is any policy with an alternative premium payment structure. Premiums usually start lower, then increase after five to 10 years. Modified whole life insurance is the most common type but modified term life insurance also exists.

Can you 1035 a MEC to an annuity?

A MEC may also be exchanged for an annuity or qualified long-term care policy. ... However, a 1035 exchange from a survivorship life policy to a single life policy is permitted under Private Letter Ruling 9330040, if one of the insureds on the survivorship life policy has died prior to the policy exchange.

What are the disadvantages of MEC?

There are some cons of a MEC that you will want to avoid if your policy is not currently considered a Modified Endowment Contract. If your policy becomes a MEC, this advantage (FIFO) goes away and the policy is treated like a typical retirement vehicle, such as a non qualified annuity.

Who benefits in investor originated life insurance?

Who benefits in Investor-Originated Life Insurance (IOLI) when the insured dies? The policyowner (investor) benefits upon the death of the insured.

Can you Overfund a whole life policy?

When you're overfunding a life insurance policy, you won't have to worry about the government placing an annual cap on your contributions. On many plans, you may contribute as much as you want each year up to a predetermined overall limit.

What is the 7 pay test for a MEC?

The 7-pay test examines the cumulative amount paid under a contract during the first seven policy years. This amount is compared to the sum of the net level premiums that would have been paid on a guaranteed seven-year pay whole life policy providing the same death benefit.

What happens if a life insurance policy fails the seven pay test?

It is possible that a contract that requires seven level annual premiums will fail the 7-pay test because the statutory net level premium will be less than the actual premium paid. Once a policy has failed the 7-pay test, it becomes a MEC and remains a MEC for the life of the contract.

Does permanent life insurance have a cash value?

Permanent life insurance policies offer a death benefit and cash value. The death benefit is money that's paid to your beneficiaries when you pass away. Cash value is a separate savings component that you may be able to access while you're still alive.