Rhode Island Life Insurance Practice Exam

What defines a Modified Endowment Contract (MEC)?

1. It provides term coverage only

2. It allows whole life payments to exceed allowable limits

3. It has no death benefit

4. It permits only burial insurance

The correct answer is: It allows whole life payments to exceed allowable limits

A Modified Endowment Contract (MEC) is defined primarily by the fact that it allows whole life insurance premium payments to exceed certain IRS-established limits. When a policy becomes a MEC, it does so because the contributions made to the policy exceed the maximum allowable cumulative premiums set forth under federal tax law. This classification affects the tax treatment of the policy, especially concerning withdrawals and loans taken against the cash value. In contrast, other options are not relevant to the definition of a MEC. The first option mistakenly identifies the contract as having term coverage only, which is not accurate, as MECs can be whole life policies with cash value. The third option is incorrect because a MEC still provides a death benefit; it simply has different tax implications. Lastly, the fourth option about permitting only burial insurance does not apply, as MECs are not restricted to burial insurance and can involve various life insurance products.