What are Modified Endowment Contracts? Ft. Mason Finance

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Thank you to Mason Finance for sponsoring this post.

Photo from Mason Finance

Often times, we go about life thinking about our day-to-day activities and things we’re looking forward to, of course, but we, as humans, try to avoid thinking of the morbid aspects of life. Life insurance policies are not something everyone likes to discuss, but sometimes, it is important to talk about it, so that families know the answer to the question of “what’s next?” Let’s talk about modified endowment contract mec. What exactly is this term? Some assets are held onto not for current or future use. Instead, they are designated to pass on to future heirs. These may be converted into modified endowment contract (MEC), which equals a larger tax-free sum and no additional out-of-pocket costs. This is indeed valuable to both yourself and your heirs. But, in order to not receive an outlandish tax bill, you will need to educate yourselves (and future beneficiaries) on how to use the MEC to your (and your heirs) advantage.

According to Mason Finance, the correct way to use the MEC is The 7 Pay Test, which they explain, “The 7 Pay Test places a limit on the number of premiums that can be paid into the policy over a period of seven years. If the premiums during this period exceed this limit, then the policy automatically becomes a modified endowment contract. This test is designed to ensure that for a life insurance policy to remain valid, the difference in dollars between the cash value in the policy and the death benefit must be at least a certain amount at all times.”

Mark Cussen, Mason Finance

Let us discuss this in layman’s terms, shall we? I’ll be honest – some of this information took me a few times to read before I could get the hang of it – so for that reason alone, I feel it’s best to explain it in plain and simple language. The 7 Pay Test is basically a premium, sum added to a charge, over a period of 7 years into the life insurance policy. If the amount is more than a usual premium in a certain period, it then becomes a modified endowment contract. This validates the life insurance policy.

Photo from Mason Finance

In order to allow your heirs to benefit from paying any additional charges when collecting this inheritance, the MEC may be the proper way to ensure your heirs a comfortable and secure future.

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