Modified Endowment Contract

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Definition of 'Modified Endowment Contract'

A modified endowment contract (MEC) is a type of life insurance policy that has been modified to make it more like an investment product. MECs are often sold as retirement savings vehicles, but they can also be used for other purposes, such as college savings or estate planning.

MECs are similar to traditional whole life insurance policies in that they offer a guaranteed death benefit and accumulate cash value over time. However, MECs also offer some of the features of an investment product, such as the ability to make withdrawals and borrow against the policy's cash value.

The main difference between a MEC and a traditional whole life insurance policy is the way that the policy's cash value is taxed. The cash value of a traditional whole life insurance policy is taxed as ordinary income when it is withdrawn, while the cash value of a MEC is taxed as ordinary income only if it is withdrawn within the first 10 years of the policy.

MECs can be a good option for people who are looking for a retirement savings vehicle that offers some of the features of an investment product. However, it is important to be aware of the tax implications of MECs before you purchase one.

Here are some additional details about MECs:

* MECs are issued by life insurance companies.
* The minimum premium for a MEC is $1,000 per year.
* MECs must have a death benefit that is at least equal to the cash value of the policy.
* MECs must be held for at least 10 years in order to avoid the early withdrawal penalty.
* The cash value of a MEC can be used to pay for qualified education expenses, medical expenses, or to purchase a first home.
* MECs can be surrendered for their cash value at any time.

If you are considering purchasing a MEC, it is important to speak with a financial advisor to make sure that it is the right product for you.

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