Will a Change in the Plan of an Adjustable Life Insurance Policy Cause it to Become a Modified Endowment Contract (MEC)?

Generally, a change in the plan of insurance that either lengthens the period of coverage or increases the face amount of coverage is treated as a material change in the policy that triggers a new seven-pay test. However, the reconfigured policy is treated as a MEC only if it fails the seven-pay test in its new configuration. In general, the insurance company will inform the policyowner if the desired change may cause the policy to fail the seven-pay test.

Also, a reduction of the face amount of coverage (or, in the authors’ opinion, a shortening of the term of coverage) within the first seven policy years triggers a recomputation of the seven-pay test that is based on the reduced death benefit level and is retroactive to the original policy issue date. The closer earlier premium payments were to the original seven-pay premium limit, the more likely is a reduction of death benefits within the first seven years to trigger reclassification as a MEC.

In the authors’ opinion, a change in the premium payment plan that does not change the level of benefits, such as a change from a whole life level premium payment plan to a paid-up at age sixty-five plan, should not be treated as a material change and should not require new seven-pay testing. However, if the change in premiums requires a change in the face amount to meet the requirements of life insurance under Code section 7702, the change should be considered material and require new seven-pay testing.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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