What is a Modified Endowment Contract (MEC)?

A Modified Endowment Contract (MEC) is specifically defined by the Internal Revenue Code with relation to life insurance policies that have a certain level of cash value accumulation. The most distinctive characteristic of a MEC is that it experiences rapid cash value growth relative to the amount of premiums paid. This occurs when a policy exceeds the allowable limits for cash value accumulation, which makes it classified as a MEC for tax purposes.

In this context, the importance of rapid cash value growth is that it impacts how the policy is treated for tax liabilities, specifically concerning loans and withdrawals from the policy. Under MEC rules, any distributions are subject to income tax on earnings before the policyholder reaches age 59½, which is not the case for standard life insurance policies. Therefore, recognizing the rapid cash value growth is key to understanding the tax implications and restrictions that come with a MEC.

This unique structure of cash value accumulation is why option B is the correct choice regarding what constitutes a Modified Endowment Contract.