MEC Explained Simply
Stay in the green zone. Test before big PUA deposits. Keep tax-favored access.
Product identification: this page discusses participating whole life insurance. It is insurance, not a bank account or investment.
We are not a bank: “The Infinite Banker” is an education brand. We do not accept deposits, and we do not offer FDIC- or NCUA-insured products.
Guaranteed vs non-guaranteed: dividends and other non-guaranteed elements are not guaranteed and may change. Any values shown that include non-guaranteed elements are for education only.
What Is a MEC?
MEC stands for Modified Endowment Contract. It’s an IRS classification that fundamentally changes how your whole life policy is taxed.
Non-MEC policy (what you want):
Policy loans are tax-free
Withdrawals up to basis are tax-free
No 10% early withdrawal penalty
Death benefit is income tax-free
MEC policy (what you want to avoid):
Policy loans are treated as taxable distributions (gain first)
10% penalty on distributions before age 59½
Loss of tax-free loan access
Death benefit still income tax-free, but living benefits destroyed
The entire infinite banking strategy depends on tax-free policy loans. Cross into MEC territory and the strategy breaks.
Why the MEC Rules Exist
In the 1980s, wealthy individuals were stuffing millions into single-premium life insurance policies, letting them grow tax-deferred, then taking tax-free loans. It was too good.
Congress responded with the Technical and Miscellaneous Revenue Act of 1988 (TAMRA), which created the MEC rules. The goal: prevent life insurance from being used as a pure investment vehicle.
The IRS now limits how much you can contribute to a policy relative to its death benefit. Exceed that limit and you lose the tax benefits.
The 7-Pay Test
The IRS uses a “7-pay test” to determine MEC status. Here’s the simplified version:
The IRS calculates the maximum you could pay into a policy to completely fund it over seven years. If you exceed that amount in any of the first seven years (or cumulatively), the policy becomes a MEC.
Example:
IRS calculates your 7-pay limit: $50,000/year
You pay $50,000 in year one: Safe
You pay $60,000 in year two: MEC violation
Once a policy is classified as a MEC, it stays a MEC forever. There’s no way to reverse it.
How PUAs Affect MEC Status
Paid-Up Additions count toward the MEC limit. So when you make large PUA deposits, you’re burning through your 7-pay capacity quickly.
Base premium alone: Usually well under MEC limits, designed conservatively
Base + aggressive PUAs: Can approach or exceed MEC limits if not tested
This is why we test before every significant PUA deposit.
MEC Testing: Your Safety Net
Most carriers provide MEC testing free of charge. You submit the proposed deposit amount, and they run the calculation:
MEC test result options:
“Deposit approved, no MEC violation”
“Deposit would cause MEC, reduce to $X to stay safe”
“Maximum deposit allowed: $X”
We never deposit without testing first. Ever.
Real-World MEC Scenarios
Scenario 1: Windfall PUA
Client receives $100,000 bonus and wants to deposit it all as a PUA.
We request MEC testing
Carrier responds: “Maximum PUA this year: $75,000”
Client deposits $75,000 now, $25,000 after next policy anniversary
No MEC violation
Scenario 2: Multiple policies
Client has two policies and a $200,000 windfall.
Policy A: MEC limit $80,000
Policy B: MEC limit $60,000
Total capacity: $140,000 this year
Client deposits $80k in A, $60k in B
Remaining $60k goes to taxable brokerage or waits for next year
Both policies stay non-MEC
Scenario 3: Unintentional MEC
Client doesn’t test and deposits $100,000 PUA. Carrier processes it. Policy crosses into MEC.
Result: Permanent MEC status
Fix: None. It’s permanent.
Damage: All future loans are taxable, 10% penalty applies if under 59½
This is why testing is non-negotiable.
The “Substantially Changed” Rule
Even after the first seven years, a policy can still become a MEC if it’s “substantially changed.” Substantial changes include:
Increasing death benefit significantly
Adding riders
Making large PUA deposits beyond certain thresholds
So MEC risk doesn’t disappear after year seven. We continue testing for major deposits throughout the policy’s life.
How We Prevent MEC Violations
Our process:
Design conservatively from day one (Base + PUA structure tested at illustration)
Test before deposits for any PUA exceeding $10,000
Monitor cumulative deposits against 7-pay limits
Communicate results clearly before client submits funds
Use multiple policies if needed to absorb larger windfalls
You will never accidentally MEC a policy working with us. We build systems to prevent it.
What to Do If You Inherit a MEC
Sometimes clients come to us with existing policies that are already MECs (often single-premium policies from the 1980s or 1990s).
Options:
Keep it as a MEC: It still grows tax-deferred and provides a tax-free death benefit. You lose loan benefits, but it’s not worthless.
1035 exchange: Potentially exchange it into a new non-MEC policy. Requires careful structuring and testing.
Surrender it: Cash out, pay taxes on gains, redeploy to non-MEC strategy. Usually last resort.
We evaluate each situation individually.
MEC Myths to Ignore
Myth 1: “You can fix a MEC by stopping contributions.”
Truth: Once a policy is a MEC, it’s permanent. Stopping contributions doesn’t reverse it.
Myth 2: “MEC isn’t a big deal because death benefit is still tax-free.”
Truth: If you’re using the policy for living benefits (loans, withdrawals), MEC destroys the strategy.
Myth 3: “MEC limits are the same for everyone.”
Truth: Limits vary based on age, death benefit, policy design, and carrier. Testing is individual.
The Bottom Line
MEC rules are the guardrails. Stay inside them and you have a powerful, tax-advantaged tool. Cross them and you’re left with an expensive savings account.
We treat MEC testing like a pilot treats pre-flight checks. It’s not optional. It’s the difference between a successful strategy and a crashed one.
This system works best for high earners with existing liquidity and the capacity to fund meaningfully each month. If that’s you, complete intake and book your Discovery call.
Invitation to inquire: The information provided is an invitation to inquire about our services and is not an offer to sell insurance or securities. Renewal, cancellation, termination: Policies require ongoing premium payments. Non-payment may result in lapse or termination. Surrendering a policy may result in fees and tax consequences. Licensing scope: We are licensed insurance professionals. We do not provide legal, tax, or investment advice. Consult your advisors. Loans reduce cash value and death benefit: Outstanding loans and interest reduce available cash value and death benefit. Loans are not required to be repaid during the insured’s lifetime, but unpaid loans will reduce death benefit. Comparisons are educational: Any comparisons to other financial products are for educational purposes only and are not guarantees of performance. “Infinite Banking Concept®” is a registered trademark of Infinite Banking Concepts, LLC. The Infinite Banker is independent: We are not affiliated with or endorsed by Infinite Banking Concepts, LLC.
