A Modified Endowment Contract (MEC) is best described as:

A Modified Endowment Contract (MEC) is best described as a life insurance contract that accumulates cash values higher than what the Internal Revenue Service (IRS) allows under its guidelines. The classification as a MEC occurs when the policy fails the seven-pay test, which determines whether the cumulative premiums paid within the first seven years of the contract exceed a specified limit. When a contract is labeled as an MEC, it means it has been funded more aggressively than permitted, leading to potential tax implications for withdrawals and policy loans.

This answer highlights the specific regulations put in place by the IRS to prevent overfunding of life insurance policies, which can allow for tax-free growth and distributions. Once a policy is classified as a MEC, any distributions taken while the policyholder is still alive may be subject to taxation on the gain, and if they are under the age of 59½, an additional penalty tax may also apply.

In contrast to other options, a MEC is not an annuity or a modified life contract enjoying standard tax advantages; it is strictly a life insurance product that has been categorized differently due to its funding status. Additionally, while tax penalties may apply to withdrawals under certain conditions, the stipulation regarding age 65 in the other options is not