Modified endowment contracts (MEC) differ from regular life insurance policies in how pre-death dividends are taxed because they are typically used as investment vehicles.
The term "modified endowment contract" (MEC) refers to a life insurance policy whose funding surpasses the federal tax law's thresholds. After a life insurance policy transforms into a modified endowment contract, the taxation system and IRS policy classification are permanently altered.
In the United States, permanent life insurance contracts are eligible for large tax breaks, but if you spend too much money in a policy, it ceases to qualify as "insurance" and turns into an investment vehicle. In other words, it is now seen as a MEC rather than a life insurance policy. The conditions of the policy and the amount of the death benefit will determine the MEC restrictions. Your insurance provider will notify you if a policy has become or is in the process of becoming a MEC.
Hence, MEC differ from regular life insurance policies in how pre-death dividends are taxed because they are typically used as investment vehicles.
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