Glossary

Seven-pay test

The IRS test that flags a policy as a modified endowment contract if premiums in its first seven years exceed what would pay it up in seven level payments.

Also called: 7-pay test, MEC test, Section 7702A

The seven-pay test, in Section 7702A of the Internal Revenue Code, was added by the Technical and Miscellaneous Revenue Act of 1988 to curb single-premium policies used mainly as tax shelters. A policy fails if, at any point in its first seven years, cumulative premiums exceed the cumulative total of the seven level annual premiums that would make it fully paid up. A policy that fails becomes a modified endowment contract (MEC).

Hypothetically, if the seven-pay premium for a policy is $10,000, cumulative premiums can't exceed $10,000 in year one, $20,000 by year two, and so on up to $70,000 by year seven. Paying $25,000 in total over the first two years would make it a MEC. A material change, such as certain increases in the death benefit, restarts the seven-year test, and reducing benefits in the first seven years triggers a retest at the lower amount.

MEC status is permanent. The death benefit stays income-tax-free, but loans and withdrawals are taxed gains-first and, before age 59½, generally face a 10 percent additional tax. That matters for anyone overfunding a policy a policy for cash value. Insurers usually monitor premiums and warn owners before a payment would trigger MEC status. See modified endowment contracts and the 7-pay test and section 7702.

Last reviewed October 4, 2026

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Related terms

Section 7702 The federal tax code section that defines which contracts count as life insurance, limiting how much cash value a policy can hold for its death benefit. Overfunding a policy Paying more into a permanent policy than its coverage requires to build cash value faster, while staying under federal limits that protect its tax benefits. Policy loan Money borrowed from an insurer using a permanent policy's cash value as collateral, with no credit check and no required repayment schedule. Cost basis For life insurance and annuities, the after-tax money put in (premiums minus tax-free amounts taken out), which sets how much of a payout is taxed. Cash value The savings component that builds inside whole life, universal life and other permanent policies, which the owner can borrow against or withdraw.

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