A Modified Endowment Contract, or a MEC, is a special type of life insurance under federal income tax law. The law attempts to differentiate between policies that are purchased primarily for tax advantages, versus policies that are purchased primarily for life insurance. Like non-MECS, MECs offer tax-free death benefits and tax-deferred cash value accumulation.
If the policy becomes a MEC and the insured does not take any distributions from that policy during the insured’s lifetime, then there will be no adverse tax implications due to contract’s MEC status. However, any pre-death distributions are taxed as “income first” (not basis first), meaning they are taxable to the extent
of gain in the policy. In addition, distributions are subject to a 10% additional tax, unless the policy owner is over
age 59 and 1/2 or has become disabled.