Question 68

A life insurance policy written after 1986 that fails to meet the seven-pay test is known as a modified endowment contract.

A modified endowment contract (MEC) is a life insurance policy that does not adhere to the seven-pay test requirements established by the IRS, resulting in different tax implications for policyholders.

A) an endowment policy.

An endowment policy is designed to pay a lump sum after a specified term or upon the death of the insured, but it is not specifically related to the seven-pay test. Therefore, this option is incorrect.

B) a modified life policy.

A modified life policy refers to life insurance with changing premiums, typically starting lower and increasing later. It does not directly relate to the seven-pay test and thus is not the correct answer.

C) a single premium contract.

A single premium contract involves a one-time premium payment for the entire policy, which can also fail the seven-pay test. However, it is not specifically termed a modified endowment contract, making this option incorrect.

D) a modified endowment contract.

A modified endowment contract is the correct term for a life insurance policy written after 1986 that fails to meet the seven-pay test. This designation alters the tax treatment of the policy, making it subject to less favorable tax rules than other life insurance policies.

Conclusion

The modified endowment contract is the only option that accurately describes a life insurance policy failing the seven-pay test established after 1986. All other options either describe different types of insurance products or fail to capture the specific regulatory definition that applies in this context.