T1-L2-P3

The Modified Endowment Contract

In 1988, Congress made some changes in the definitions of life insurance to discourage its use as a tax avoiding investment. The act was named TAMRA.

A Modified Endowment Contract (MEC) is:

"A life Insurance policy under which the amount the policy owner pays in during the first years exceeds the sum of net level premiums that would have been payable to provide paid-up future benefits in seven years."

Remember it as the TAMRA 7-year rule.

 

If a policy is deemed a MEC and the policy owner receives any funds from it in the form of a loan or withdrawal, the funds will be taxed first as ordinary income and second as return of premium, if there is any gain in the policy over premiums paid.