Keyman Insurance
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However, if a contract fails the input tests, it becomes the dreaded hybrid MEC, a curse from which it cannot recover. A MEC, which combines elements of whole life with those of annuities, retains the major attractions of keyman insurance policy, including tax-favored death benefits and untaxed internal cash buildup that frequently surpasses that of whole life. However, when the money exits the contract for reasons other than death, such as surrenders, loans, collateral uses or withdrawals, MECs become subject to the same last-in-first-out rules as annuities. This means distributed amounts are taxed, and an additional 10% penalty tax applies in all but three instances.
