What is a MEC? And Is it "Bad?"

A MEC, or Modified Endowment Contract, is a life insurance policy that fails to meet the Internal Revenue Code's TAMRA 7-pay test. This test stipulates the total amount of money that can be paid into a life insurance policy in a seven-year period, beginning on the day the policy is issued. If a policy owner makes a material change to the policy before or after the seven-year period, a new seven-year period begins. A material change includes increases in the death benefit.

In some situations, such as when whole life insurance is purchased for college planning or as a smart money alternative, the benefits of a policy being a MEC contract may outweigh the disadvantages. However, if a whole life insurance policy unintentionally becomes a MEC contract, it can be potentially costly because any money the policy owner receives from the policy—except the death benefit—is taxable income to the extent there is a gain in the policy.

Avoiding MECs
Here are three major situations that can potentially cause a policy to become a MEC, although there are other reasons. They are: 1) if a policy owner pays too much money into a policy; 2) if the owner surrenders part of the cash value from the contract; or 3) if he or she reduces the policy’s face amount.

If your MTL Insurance policy is on the verge of becoming a MEC, you will receive a letter from MTL advising you of the situation, and notification will also be sent to your MTL Insurance Advisor. The letter will state the date before which you need to contact either MTL’s Policy Change Department, or your MTL Insurance Advisor, so we can help you reverse the MEC classification of your policy. It is important that you contact us before this date so we can work with you to select the best approach for you for preventing your policy from becoming a MEC. For more information, contact your MTL Insurance Advisor, or call or email the home office at 800-323-7320, ext. 5070, or PolicyOwnerServices@mutualtrust.com.

*MTL does not provide tax or legal advice. Thus, this article is not intended to provide you with tax or legal advice and should not be solely relied upon when making financial decisions involving MECs. You should consult with a tax or legal expert of your choice to fully learn about the potential tax and legal effects that MECs may have on you.

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