Which statement is true about the 7-pay test and MEC?

• A. Passing the test makes the policy MEC
• B. The test applies only to Term Policies
• C. It Is Not Related to MEC Status
• D. Failing the test Means the Policy Is a MEC

Answer: (D)

The 7-pay test is a rule used to determine if a life policy has funded its cash value too aggressively in the first seven years. If the total premiums paid in those early years exceed the amount that would have funded a paid-up policy in seven years, the policy fails the test and becomes a MEC. Once a policy is a MEC, distributions are taxed as ordinary income to the extent of the cash value, rather than being treated as a return of premium. This is why the statement is true: failing the 7-pay test directly creates MEC status. The test applies to any cash-value policy, not just term policies, and it is indeed related to MEC status. If the test is passed, the policy is not a MEC.