Modified Endowment Contract, also known as a “MEC,” is something one should avoid when using Life Insurance as a retirement supplement, in most cases.
A MEC is not a bad life insurance policy, it just has different income tax-benefits from non-MEC life insurance.
What does does a Modified Endowment Contract mean to you? In simple terms:
- A MEC is taxed like life insurance on death of the insured, but
- Taxed like an annuity while the insured is alive.
A single-premium life insurance policy is a Modified Endowment Contract in most situations, depending on when it was issued. It is subject to virtually the same rules as an annuity under Internal Revenue Code Section 72, but still retains the income-tax free death benefits, making it a viable alternative to a deferred-annuity where the policy owner has no intention of spending the money and wishes to leave it for their heirs.
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