Can a Modified Endowment Contract Help College Bound Students with Needed Funds?

Today, the cost of a college education can far exceed that of even a mortgage. So, when clients are working to save for a child, grandchild, or other loved one’s future education, they are oftentimes looking for strategies that can ensure that regardless of what happens, there will still be money readily available. One way to provide for that is through permanent life insurance – particularly with policies that are deemed as Modified Endowment Contracts.


Understanding Modified Endowment Contracts as a College Savings Vehicle

A Modified Endowment Contract, or MEC, is defined as a “tax qualification of life insurance policy where the policy has been funded with more money than allowed under federal laws. If the cumulative premium payments exceed certain amounts that are specified under the Internal Revenue Code, then the life insurance will become a MEC.”1

What essentially differentiates a Modified Endowment Contract from a regular life insurance plan is the amount of the cumulative premium payments into the policy that are above a certain limit that has been specified in the Internal Revenue Code.

When this happens and the policy is classified as a MEC, it will always remain so – even if the policy is reconfigured or changed at a later time that would make it appear that the policy no longer meets the guidelines of being a MEC.

The cash that is in the cash value component of the policy is allowed to grow tax-deferred, meaning that there is no tax due on the gain until the time of withdrawal. Plus, just as with a regular life insurance policy, the death benefit that is payable to the beneficiary is not subject to income tax.

Therefore, given the tax-deferred cash value build-up, as well as the available proceeds from the death benefit “just in case,” a Modified Endowment Contract could provide a viable method of providing needed funds for higher education.


How a Whole Life MEC Can Benefit College Bound Students

For those whose goal is to save funds for a child’s future college education, a Modified Endowment Contract Whole Life Insurance Policy could act as an ideal vehicle through which to do so. One reason for this is the tax-deferred benefit on the growth within the cash value account in the policy. This can help to grow capital much faster than using non-tax-advantaged financial vehicles like CDs, Stocks, or Mutual Funds.

The way in which assets grow within a MEC also complies with the many rules that have been set forth with regard to tax-advantaged college savings, including those of the Department of Education, FAFSA, and the Expected Family Contribution guidelines.

Another substantial benefit of using a MEC for college savings is the guarantee that funds will be available for the purpose they were originally intended for. Unlike most other types of college savings plans, a MEC can help to “lock in” the promise that cash will be available. This is because even if the policy holder dies soon after making the initial contribution, the death benefit proceeds will pass to the beneficiary, allowing the recipient use of the funds for college expenses.

Modified Endowment Contracts will typically provide a lower amount of death benefit, which oftentimes – based on the policy premium payment – will result in greatly increased cash value build-up over a short period of time. Therefore, if designed properly, there will be no annual tax consequences on that gain until the time that the policy holder accesses the funds.


Helping Students While Also Growing Your Business…and Your Income

Want to join thousands of other insurance professionals who are showing their clients the benefits of using permanent life insurance as a tax-advantaged college savings vehicle, while at the same time growing business…and commission income?

Give us a call today, toll-free, at 1-800-643-6143 and we will show you how to get started.




  1. Modified Endowment Contract – MEC. Investopedia. (


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Brian J. Kay, Executive Director, Leads4Insurance
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