MEC (modified endowment contract)
Cash Value Policies: MEC (Modified Endowment Contract)
Description Premiums Cash Value Advantages Disadvantages Uses
Investment-rich policies targeted for negative income tax treatment under the Internal Revenue Code Fixed, or variable, depending on policy Cash value builds up quickly, when compared to other cash value policies Retains the following tax advantages: (1) Death benefit is income tax free, and (2) cash build-up is not subject to income tax, provided not withdrawn during life The gain on lifetime amounts removed from policy by loan or withdrawal is taxable, and if the owner is under age 591/2, is subject to an additional 10% on amount subject to income tax Buyers interested in tax-sheltered, investment-rich policy, who do not intend to make pre-death policy withdrawals; Wealthy owners who use such policies to transfer income estate tax free