A material change in a modified endowment contract (MEC) results in which condition applying again?

A modified endowment contract (MEC) is a type of life insurance policy that has surpassed certain funding limits defined by the IRS, specifically the 7-pay test. When a policy is classified as a MEC, it loses some of the tax advantages typically associated with life insurance, particularly regarding withdrawals and loans against the policy.

When there is a material change to a MEC, such as an increase in death benefit or a significant change in premium payments, the policy may be re-evaluated against the 7-pay test. This re-evaluation is crucial because it determines whether the policy remains compliant with the funding limits applicable to avoid classification as a MEC.

In the context of the question, indicating that the 7-pay test adjusted for cash value applies again after a material change signifies that the policy needs to be reassessed to ensure it does not exceed the allowed amount of premiums that can be paid without crossing into MEC territory once more. This reassessment helps ensure that the policyholder remains aware of the tax implications associated with the policy’s funding.

Thus, stating that the 7-pay test adjusted for cash value applies again accurately reflects the necessary action that must be taken when a material change occurs in a MEC, reinforcing the importance of compliance with IRS regulations