Arkansas Life and Health Insurance Practice Exam

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Which of the following would always be considered a Modified Endowment Contract?

Deferred Annuity
Single Premium Whole Life
Universal Life
Variable Life

The correct answer is: Deferred Annuity

Annuities do not qualify as life insurance due to their distributions being subject to taxes as ordinary income. A Modified Endowment Contract (MEC) is a life insurance contract that becomes ineligible for certain tax benefits because of certain Internal Revenue Code (IRC) provisions being violated. For example, if a single premium life contract is exchanged for another contract with a premium that is more than the net amount at risk, it will not qualify as life insurance and will be considered a Modified Endowment Contract (MEC). The other options, such as Universal Life and Variable Life, can potentially be considered MECs depending on certain factors and circumstances, but a Deferred Annuity is always considered a Modified Endowment Contract, making it the correct answer.