<P> Distributions (either withdrawals or loans) that go beyond the policy basis will be subject to a 10% penalty tax for policy owners under the age of 59.5 (this can be avoided by the use of a 72 (v) distribution) </P> <P> Transferring funds from a Modified Endowment Contract to a new life insurance policy via the 1035 exchange privilege will render the newly issued contract as Modified Endowment Contract as well . </P> <P> In some cases, such as for estate planning, a person may purposely create a modified endowment contract in order to purchase the least insurance and therefore have the lowest insurance costs possible in order to receive the desired benefit . It may be used to pass more money on to heirs . After a life insurance policy is considered a modified endowment contract, it cannot be reclassified as a standard life insurance contract again . </P>

When does a life insurance policy become a modified endowment contract