Modified Endowment Contracts Sample Clauses

A Modified Endowment Contract (MEC) clause defines when a life insurance policy is classified as a MEC under IRS rules, typically due to excessive premium payments in relation to the policy’s death benefit. This classification changes the tax treatment of withdrawals and loans from the policy, making them subject to income tax and possible penalties if taken before age 59½. The core function of this clause is to inform policyholders of the tax implications and restrictions that apply if their policy becomes a MEC, helping them avoid unintended tax consequences.