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'). 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. Option A — premium-paying period alone doesn't trigger MEC. Option B describes a corridor issue, not MEC. Option D — conversion doesn't restart the 7-pay test, but it can trigger 'material change.'
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