Modified Endowment Contract Series: MECs 101

Modified Endowment Contracts: Chapter 2 of 5

Now that you understand more of the basics of an MEC, we should review some key points about them.

MEC 101

• Based on professional financial advice, some policyholders follow a unique strategy of overpaying their total premium payments to exceed amounts specified under the Internal Revenue Code.
• When that happens, the policy then automatically evolves into a Modified Endowment Contract (MEC).
• When your policy becomes a MEC by IRS standards, the death benefit payout will still qualify for income tax-free treatment.
• What makes a MEC differ from a traditional permanent life insurance policy is that if a policyholder takes any distributions from their policy over their life time, that money may have additional taxes and penalties levied onto it as it will now be taxed on a “income-first” basis.

Modified Endowment Contract Yields

However, while the money from a MEC stays in the account, taxes do not need to be paid. With a MEC, investors are provided a tax-free way to accumulate wealth. Compared to other investment opportunities, ultimately a MEC can generate a larger yield for the investment because of the tax-deferred status of the product.

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