Definition
Modified Endowment Contract (MEC)
A life insurance contract that fails the §7702A seven-pay test, losing tax-free access to cash value during life.
Full definition
A MEC is a life insurance contract that, in one of its first seven policy years, receives more premium than a benchmark seven-pay schedule permits. MECs retain the income-tax-free death benefit under §101(a) but lose FIFO tax treatment on lifetime distributions: loans and withdrawals are taxed on a gain-first basis and, before age 59½, are subject to a 10% penalty. PPLI can be designed intentionally as either a MEC or a non-MEC.
Related terms
IRC §7702A
The Modified Endowment Contract rules — the seven-pay test that governs whether a policy is a MEC.
Non-MEC Design
A PPLI policy funded within the §7702A seven-pay limits so lifetime loans and withdrawals stay tax-favored.
DEFRA
The Deficit Reduction Act of 1984, which enacted §7702 and defined life insurance for federal tax purposes.
TAMRA
The Technical and Miscellaneous Revenue Act of 1988, which enacted §7702A and the seven-pay MEC test.
Availability, tax treatment, and policy design depend on jurisdiction, carrier, investor qualification, and applicable law. simpleppli.com provides general educational information only — not tax, legal, insurance, or investment advice. Consult qualified tax counsel, insurance counsel, and licensed insurance professionals before implementing any PPLI structure.