There is a limit to how much premium can be put into the investment account in the first seven years for the policy to retain all its tax advantages and on-going tests as the investment account grows. If the policy fails this tests, then it becomes a Modified Endowment Contract (MEC). While a MEC still offers a tax-free death benefit and tax-deferred growth potential, there are income tax implications if the policy owner borrows, withdraws from or surrenders the policy.
There are tests if the premiums exceed 7-year IRS guidelines (which vary by age and gender of the insured and must be calculated by the insurance company). Beyond the 7 years, a similar test is invoked if there are material changes to the policy. Examples of material changes include (but are not limited to): face amount increases, exchange of insured, increase or addition of certain riders and plan changes. The test selected can have a significant impact on premiums, cash surrender values and death benefits. These tests limit the account value and premiums paid relative to the death benefit.