What requirement must be met for a life insurance policy to be classified as a Modified Endowment Contract?

A life insurance policy is classified as a Modified Endowment Contract (MEC) when it fails to meet the 7-pay test, which assesses whether the total premiums paid within the first seven years of the policy exceed the total premiums that would have been paid under a seven-pay whole life insurance policy. Essentially, if the premiums paid into the policy are higher than the allowed amount as defined by the 7-pay test, it will be categorized as a MEC.

This classification is significant because MECs have different tax implications compared to traditional life insurance policies. Withdrawals and loans taken from a MEC are taxed on a last-in, first-out basis, meaning that any gains are taxed first, which can be less favorable for policyholders compared to the treatment of non-MEC policies.

In contrast, a policy meeting a 10-pay test or being a term life insurance policy does not necessarily have relevance to the classification of a MEC. Passing a standard insurance examination relates to licensure, which is unrelated to the classification criteria for life insurance policies.