What is the primary characteristic of a Modified Endowment Contract (MEC)?

A Modified Endowment Contract (MEC) primarily differs from standard life insurance policies in its tax treatment concerning distributions. The primary characteristic of a MEC is that it is subject to different tax rules for distributions. Specifically, if a policy is classified as a MEC, withdrawals and loans against the cash value are taxed less favorably compared to non-MEC policies. Distributions are subject to income tax and may incur an additional penalty tax if taken prior to the policyholder reaching age 59½.

This designation is often a result of the excessive premium payments made within a short period, which can cause the policy to fail the seven-pay test. The tax implications highlight the importance of understanding the structure and funding of life insurance products, particularly when considering cash value and the timing of withdrawals.

This focus on taxation clarifies why the other choices do not accurately define the core characteristic of a MEC, which revolves around tax treatment rather than premiums, cash value, or death benefits.