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Modified Endowment Contracts (MECs) are life insurance policies, specifically whole life policies, into which excessive amounts of money have been deposited. Historically, prior to a regulation enacted in 1984, wealthy individuals exploited these policies as high-interest cash accumulation vehicles. The IRS intervened, asserting that the primary purpose of life insurance is to provide for family welfare upon the policyholder's death, not personal gain. To address this misuse, the IRS established the "seven-pay rule," which restricts the amount that can be paid into a life insurance policy over the first seven years. If this limit is surpassed, the policy is deemed a MEC, imposing caps on benefits and tax advantages.
