What is a Modified Endowment Contract (MEC)?

When premiums are paid into a life insurance policy more quickly than normal (usually less than 7 years), the policy is still a life insurance policy but it is considered a Modified Endowment Contract, or MEC.

How does a life insurance policy become a MEC?

Under the Technical and Miscellaneous Revenue Act of 1988 (TAMRA), the federal government limits the amount of money that can be paid into a life insurance policy within the first 7 years from the date of issue. This is referred to as the 7 Pay Test. If the amount paid within the first 7 years exceeds the limit, the policy will be classified as a MEC.

Are Single Premium policies considered MEC’s?

Yes. TAMRA makes any net single premium life insurance policy, such as AAFMAA’s Wealth Builder Life Insurance policy, a MEC.

Gains are taxed first for any withdrawals, either by loan or cash surrender, under last in first out (LIFO) accounting. The cost basis is not taxed however it will be considered the last money to come out of the MEC for tax purposes. The gain is taxed as ordinary income to the owner.

Are there additional penalties for withdrawals?

Yes. Any withdrawals before age 59 ½ is subject to a 10% penalty on the amount of any gain.

Is the Death Benefit taxed?

The death benefit of a MEC can still be passed to beneficiary’s tax free.

Can a MEC be reclassified as a life insurance policy?

Once a life insurance policy is classified as a MEC, it cannot be changed back to a non-MEC policy.

Are there any implications if I have multiple MEC policies as opposed to a single, larger policy?

The IRS considers Wealth Builder Life Insurance or any other MEC policy, issued by the same insurer to the same policyholder during the same calendar year, to be aggregated when determining the amount of any distribution that is taxable.

What are the potential tax implications of having multiple MEC policies?

If you decide to cash surrender one of several policies purchased during the same calendar year, you will have to pay taxes on the interest earned for all of the policies with that first policy. When you cash surrender subsequent policies, since you have already paid some or all of the taxes, you will pay less tax on the gain for those subsequent policies. Ultimately the amount of total taxes if the polices are surrendered will be the same, because the tax basis of the subsequent policies will be increased to reflect the taxes already paid. There will be no impact on policies that are annuitized, if all polices surrendered simultaneously, or if the policy owners dies.

Does a MEC policy, such as Wealth Builder Life Insurance make sense?

YES - Although these policies have a slightly reduced tax benefit if they are cashed in separately, they still serve as a stable retirement planning tool. They are good alternatives to annuities, which immediately become taxable upon the death of the owner. All AAFMAA life insurance benefits pass tax-free to heirs. Wealth Builder Life Insurance can be appropriate for members who do not qualify for other insurance products, for members looking for a way to leave a tax-free inheritance to family members, or for members who wish to annuitize their policies and receive a steady stream of income for the remainder of their life.

Take action today. Call our experts at: phone icon1-800-522-5221

AAFMAA Blog

Read Article

Let's Talk

Contact a Representative
1-800-522-5221
Mon - Fri 8:30AM - 5:30PM ET
(Insurance Sales until 7:00PM)

Copyright 2020 American Armed Forces Mutual Aid Association. 102 Sheridan Avenue, Ft. Myer, VA 22211-1110
The U.S. Government does not sanction, recommend or encourage the sale of these life insurance products. Subsidized life insurance may be available from the Federal Government.

AAFMAA Wealth Management & Trust

Financial Planning, Investment Management, and Trust Services provided by AAFMAA Wealth Management & Trust, a North Carolina Limited Liability Company wholly owned by AAFMAA. Physical address: 639 Executive Place, Suite 200, Fayetteville, NC 28305.
Information provided by AAFMAA Wealth Management & Trust LLC is not intended to be tax or legal advice. Nothing contained in this communication should be interpreted as such. We encourage you to seek guidance from your tax or legal advisor. Past performance does not guarantee future results.

AAFMAA Mortgage Services LLC

Mortgage services provided by AAFMAA Mortgage Services LLC, an Equal Housing Lender and a wholly-owned subsidiary of AAFMAA. AAFMAA Mortgage Services LLC is only available for the financing of residential property in the states listed on our Legal & Licensing page. All loans are subject to credit approval. Physical address: 639 Executive Place, 3rd Floor, Fayetteville, NC 28305. Lender NMLS: 1423968
https://www.nmlsconsumeraccess.org/

Disclaimer | Legal & Licensing | Privacy Policy | Fair Lending Notice | Terms & Conditions

Equal Housing Opportunity logo

Cap Loan

Member Benefits

Rates

Contact

Complimentary Portfolio Review

Investment Management Account

AAFMAA Blog

Cash-Out Refinance vs HELOC – Which is Right for Me?

VA Loan Update: Larger Loans (Still with No Down Payment)

Mortgage Loan Application Checklist

5 Ways to Tackle Holiday Credit Card Debt

5 Reasons To Buy A House In Winter

6 Affordable DIY Projects to Keep Your Home Warmer this Winter

A Military Spouse’s 3 Tips to Smooth Your Next PCS Move

Your Cheat Sheet of the 11 Most Important Mortgage Acronyms

5 Smart Question to Ask Your Lender

What is a Conventional Loan?

Let's Talk

AAFMAA

Life Insurance

Mortgages

Benefits of Membership

Wealth Management

Contact a Representative:

AAFMAA

AAFMAA Wealth Management & Trust

AAFMAA Mortgage Services LLC

Life Insurance

Learn

Cap Loan

Member Benefits

Mortgages

Learn

Rates

Contact

Wealth Management

Learn

Complimentary Portfolio Review

Investment Management Account

AAFMAA Blog

Cash-Out Refinance vs HELOC – Which is Right for Me?

VA Loan Update: Larger Loans (Still with No Down Payment)

Mortgage Loan Application Checklist

5 Ways to Tackle Holiday Credit Card Debt

5 Reasons To Buy A House In Winter

6 Affordable DIY Projects to Keep Your Home Warmer this Winter

A Military Spouse’s 3 Tips to Smooth Your Next PCS Move

Your Cheat Sheet of the 11 Most Important Mortgage Acronyms

5 Smart Question to Ask Your Lender

What is a Conventional Loan?

Sign up for our newsletter

Let's Talk

Life Insurance

Mortgages

Wealth Management

AAFMAA

Life Insurance

Mortgages

Benefits of Membership

Wealth Management

Contact a Representative:

AAFMAA

Life Insurance

Mortgages

Wealth Management

Benefits of Membership

Contact a Representative:

AAFMAA Wealth Management & Trust

AAFMAA Mortgage Services LLC