The MEC Limit is the maximum amount of money you may deposit to a policy per year. This is an IRS limit. If we exceed this limit, our policy becomes classified as a MEC, and we have to deal with taxes. Did you know that you can set the MEC limit wherever you want? Below are a few bullet points that you may find helpful:
- The MEC Limit directly relates to your Age, Death Benefit, Gender, and Guaranteed Rate on a policy.
- Another name for the MEC Limit is the “7-Pay Premium test”. This has to do with the first seven years of a life insurance policy. If you have a $10,000 MEC limit policy, the maximum amount you can pay each year is $10,000 for the first seven years. Beginning year 8, the MEC limit will reset. The limit resets based on your age, death benefit, and cash value at the time.
- If you don’t use it, you don’t lose it. Any unused MEC space will roll over year-to-year. For example, if you have a $10,000 MEC Limit, you can pay $10,000 per year. If you pay $5,000 in year 1, you can pay $15,000 in year 2 to make up for the $5,000 you did not pay in the first year. Unused MEC space will continue to roll over as the years pass.
- What if you exceed your MEC limit? Not to worry. If you exceed your MEC limit, it is straightforward to reverse. Insurance companies will notify us, and we quickly reverse it.