What is a MEC?
A Modified Endowment Contract (MEC) is a life insurance contract classification that can change the tax treatment of distributions. Pocket-CFO tracks supplied data; it does not determine final status.
Tax and insurance planning
Modified Endowment Contract (MEC)
Understand how Pocket-CFO tracks supplied 7-pay limits, what inputs are required, and where advisor review is mandatory.
Backend-tracked formulas
Cumulative premium utilization: cumulative premiums paid / supplied cumulative 7-pay limit
Remaining capacity: supplied cumulative 7-pay limit - cumulative premiums paid
Potential excess: cumulative premiums paid - supplied cumulative 7-pay limit
Why MEC status matters
Loans, withdrawals, surrenders, or dividends from a MEC can require tax review. Advisor review is required before making insurance or tax decisions.
What is the 7-pay test?
The 7-pay test compares premiums paid during the test period against limits determined from policy-specific actuarial data. Pocket-CFO requires insurer/advisor-provided limits.
What data Pocket-CFO needs
Policy issue date, premium payment history, supplied 7-pay limits, death benefit changes, material changes, loans, withdrawals, distributions, and owner age for distribution review.
How Pocket-CFO estimates MEC risk
The backend compares cumulative premiums against supplied cumulative limits and flags missing data, near-limit utilization, possible excess premiums, and review-required events.
What Pocket-CFO does not do
It does not independently compute actuarial 7-pay premiums, determine final MEC status without insurer/advisor data, calculate final tax liability, or provide legal/insurance advice.
Tax planning considerations
Potential or confirmed MEC status can affect tax review for distributions. Pocket-CFO creates review-required recommendations only.
Advisor review checklist
Confirm policy issue date, supplied 7-pay limits, material changes, death benefit changes, premium history, cost basis, and distribution gain portions with the insurer, CPA, and insurance professional.