A "premature" distribution from a modified endowment contract (MEC) incurs what penalty tax?

A premature distribution from a modified endowment contract (MEC) incurs a 10% penalty tax. This applies to withdrawals or distributions made before the policyholder reaches the age of 59 ½. MECs are a specific type of life insurance policy with cash value that has been funded more quickly than allowed under the tax laws, which affects how distributions are taxed. The 10% penalty acts as an additional tax measure aimed at discouraging individuals from using these financial products primarily for cash flow rather than for their intended long-term insurance benefits. This penalty is in line with traditional tax rules regarding early distributions from qualified accounts, further reinforcing the importance of understanding the tax implications when considering accessing funds from a MEC.