A MEC is triggered when a policy is overfunded according to which test?

• A. Reaching the age limit
• B. Converting to term life
• C. Underfunding relative to the seven-pay test
• D. Overfunding the cash value according to the seven-pay test

Answer: (D)

The concept being tested is how a Modified Endowment Contract (MEC) is determined. A MEC occurs when the policy is funded beyond the limits set by the seven-pay test in the early years. The seven-pay test compares the premiums paid during the first seven years to the amount that would fund the policy on a seven-pay schedule. If the premiums paid exceed that limit, the policy becomes a MEC.

Understanding this helps explain the consequences: once a policy is a MEC, any distributions are taxed as ordinary income to the extent of the policy gains, and distributions before age 59.5 may incur a 10% penalty. The trigger is specifically about overfunding relative to the seven-pay threshold, not about reaching an age, converting to term, or underfunding.