Modified Endowment Contract - MEC
Categories: Retirement
Life insurance falls into its own category when it comes to taxes. The amount of money that a beneficiary receives from a life insurance payout usually goes untaxed by the federal government.
However, some people have tried to take advantage of this fact. They have used the no-tax life insurance thing as a loophole to avoid inheritance taxes. Rather than let their money pass on to their heirs in a normal (taxable) way, they load up on "life insurance" that isn't really life insurance. It's a move meant to pass on money tax-free.
Because of this, the tax status of life insurance has limits and restrictions meant to counteract these tax dodges. In other words, the IRS is hip to the technique. Contracts that want to be life insurance but aren't really life insurance are called modified endowment contracts.
An MEC generally operates like life insurance (you pay premiums; you die; your beneficiaries receive some money), but the policy has been worked over in such a way that it ceases to be actual life insurance. Instead, it becomes a kind of tax shelter.
