Annuities✓ Verified · outline & fact-checked · Sep 2026Difficulty 3/5
What triggers a life insurance policy to be classified as a modified endowment contract (MEC)?
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Under IRC Section 7702A, a life insurance policy becomes a MEC if the amount of premiums paid exceeds the sum of the premiums that would have been paid to endow the policy under the 7-pay test — the 7-pay limit. Funding the policy too quickly concentrates the investment character of the contract, so the law strips it of favorable life-insurance distribution treatment and applies the LIFO-plus-penalty rules instead.
Why the other options are wrong
- B) Early surrender affects cash value and nonforfeiture treatment, not MEC status.
- C) Conversion to a variable annuity changes the product, it does not classify the existing policy as a MEC.
- D) Death within the contestable period relates to the incontestability clause and claims review, not to MEC classification.
Memory hook
7-pay test = the funding speed limit. Pay over it and the policy turns into a tax-unfriendly MEC.