Modified Endowment Contract (MEC) Modified Endowment Contract (MEC)
Created in 1988 through an Internal Revenue Code (TAMRA Section 7702A), the MEC was created to prevent policyholders from using cash-value policies like universal or whole life solely as a source of tax-favorable loans. A life insurance contract becomes a MEC when, during the first seven years or when any material change is made, a policyholder's premiums exceed a specified limit known as the "7-Pay Limit." The limitations of a MEC include taxation of loans or withdrawals, and an additional 10% penalty tax for withdrawals made by the policyholder prior to age 59½.