What is a Modified Endowment Contract (MEC)?

A Modified Endowment Contract (MEC) is a specific type of life insurance policy that has failed to meet certain IRS guidelines regarding premium payments and cash value accumulation. When a life insurance policy contributes more cash value than allowed in a specified time frame, it is classified as a MEC. This classification has significant tax implications for the policyholder, particularly regarding how distributions from the policy are taxed. Distributions from a MEC, such as loans and withdrawals, can be taxed as ordinary income and are subject to penalties if the policyholder is under the age of 59½.

Understanding the tax treatment of MECs is crucial for policyholders, as it can affect their financial planning and the utilization of the policy's cash value. In contrast, the other options do not align with the definition or characteristics of a Modified Endowment Contract. For instance, a variable annuity is an investment product and does not pertain to the cash value restrictions of life insurance policies, while health policies and group insurance plans serve entirely different purposes in providing health benefits rather than accumulating cash value.