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In the 1970s, life insurance companies took advantage of tax-free growth in cash value policies by allowing significant cash accumulation, enabling policy owners to withdraw interest and principal as tax-free loans, effectively creating tax shelters. In response, Congress enacted the 1988 Technical and Miscellaneous Revenue Act (TAMRA), establishing the Modified Endowment Contract (MEC) classification to prevent this misuse. To avoid MEC status, flexible premium policies must pass the 7 pay test, limiting premium payments over seven years. Policies exceeding these limits become MECs, losing their tax advantages permanently, although unused cap space can accumulate. New policies also have unique premium limits that expire after seven years.
