Section 7702A is the Internal Revenue Code provision that defines modified endowment contracts (MECs) and establishes when a life insurance policy becomes subject to less favorable tax treatment on distributions. A policy is classified as a MEC if it fails the seven-pay test or certain other funding tests, meaning it has been funded too quickly relative to its death benefit. MEC status does not affect the tax-free nature of death benefits, but it changes the taxation of loans and withdrawals, which are then treated on an income-first basis and may be subject to a 10 percent penalty if taken before age 5912. Section 7702A is central to managing the balance between aggressive funding and tax-efficient access to life insurance cash values.

Carriers build section 7702A MEC testing into their illustration and administration systems, warning advisors when premium patterns would create MECs. Advisors may deliberately design MECs for clients focused purely on death benefit or legacy, but they typically avoid MEC status when tax-favored access to cash values is important. Advanced planning discussions around maximum-funded life insurance, supplemental retirement income, and premium changes are grounded in section 7702A mechanics. Understanding 7702A helps advisors explain why funding must be paced, why changes to death benefit or premium can trigger MEC re-testing, and what trade-offs occur if a client chooses MEC status anyway.