---
title: What is a modified endowment contract (MEC) | Coverfolk
url: https://coverfolk.com/answers/mec
updated: 2026-10-08
---

# What is a modified endowment contract (MEC)?

Updated October 8, 20263 sourcesCoverfolk team[Fact checked](/editorial-standards)

The short answer

A MEC is a life insurance policy that was paid in too fast under tax law. It loses some tax breaks on loans and withdrawals, but the death benefit is still usually tax free.

Tax law has a 7 pay test. If you put in more in the first 7 years than it would take to pay the policy off with 7 equal yearly payments, it becomes a MEC.

This mostly happens with big early payments into whole life or universal life.

With a MEC, loans and withdrawals are taxed as gains first. A loan counts like a withdrawal for tax purposes.

There is also a 10% extra tax on the taxed part if you are under age 59 and a half. Exceptions include being disabled.

Once a policy is a MEC, it stays one. A policy you get by trading in a MEC is also a MEC. Big changes like raising the death benefit can restart the test.

* Paying in a lot early can trigger it
* Loans and withdrawals get taxed first
* 10% extra tax before 59 and a half
* It cannot be undone

## More questions

### Is a MEC bad?

Not always. If you never plan to borrow or withdraw, the death benefit works the same. It matters if you want to use the cash.

### How do I know if my policy is a MEC?

Ask your insurer in writing. They can tell you if your policy has passed the 7 pay test.

### Is the death benefit taxed?

Usually no. The IRS says life insurance paid to a beneficiary because of a death is generally not taxed.

## Words to know

[Universal life](/glossary)
:   Permanent life insurance with flexible premiums and a cash value. If the cash value runs out, the policy can lapse.

[Whole life](/glossary)
:   Permanent insurance that lasts your whole life as long as you pay. Premiums, death benefit, and cash value are guaranteed.

## Sources

1. [26 U.S. Code 7702A: Modified endowment contract defined](https://www.law.cornell.edu/uscode/text/26/7702A)
2. [26 U.S. Code 72: Annuities and certain life insurance contracts](https://www.law.cornell.edu/uscode/text/26/72)
3. [IRS: Life insurance and disability insurance proceeds](https://www.irs.gov/faqs/interest-dividends-other-types-of-income/life-insurance-disability-insurance-proceeds)