A Modified Endowment Contract (MEC) is BEST described as:

Explanation

Under IRC §7702A, a life insurance contract becomes a Modified Endowment Contract if cumulative premiums paid into the contract during the first 7 contract years exceed the sum of net level premiums that would have been required to fully pay up the policy in 7 years (the '7-pay test'), which is exactly what the correct description states. MEC status, once attached, is permanent. The economic effect: the death benefit remains income-tax-free, but all LIVING distributions (loans, withdrawals, assignments) are taxed gain-first under §72(e)(10) and subject to a 10% penalty if before 59½ under §72(v). Single-premium and 'short-pay' designs are most susceptible. Writing a whole life policy with a 20-year premium-paying period does not create a MEC — the premium-paying period alone doesn't trigger it. A universal life contract whose cash value grows larger than its stated death benefit describes a corridor issue, not a MEC. And converting a term policy to permanent doesn't restart the 7-pay test, though it can trigger a 'material change.'