A Modified Endowment Contract (MEC) is best described as

• A. A contract with no cash value
• B. A term policy with rider
• C. A life insurance contract which accumulates cash values higher than the IRS will allow
• D. A contract that does not accumulate cash value

Answer: (C)

Modified Endowment Contract describes a life insurance policy funded beyond the IRS seven‑pay threshold, so it’s reclassified for tax purposes. When a policy fails that test, its cash value grows in a way that triggers different tax rules: withdrawals and loans are taxed as ordinary income to the extent of the policy’s gains, rather than receiving the more favorable tax treatment that applies to non‑MEC cash‑value policies. The death benefit remains generally income tax‑free to beneficiaries, but the living‑benefit tax treatment changes. The statement that it is a life insurance contract with cash values accumulating higher than the IRS will allow captures this reclassification and its tax consequences. The other descriptions are not accurate: MECs do have cash value, they are not simply term policies, and they do accumulate cash value, just in a way that triggers MEC status.