26 U.S.C. § 7702A: Modified endowment contract defined

is entered into on or after June 21, 1988 , and fails to meet the 7-pay test of subsection (b), or which is received in exchange for a contract described in paragraph (1) or this paragraph. For purposes of subsection (a), a contract fails to meet the 7-pay test of this subsection if the accumulated amount paid under the contract at any time during the 1st 7 contract years exceeds the sum of the net level premiums which would have been paid on or before such time if the contract provided for paid-up future benefits after the payment of 7 level annual premiums. as of the time the contract is issued, and by applying the rules of section 7702(b)(2) and of section 7702(e) (other than paragraph (2)(C) thereof), except that the death benefit provided for the 1st contract year shall be deemed to be provided until the maturity date without regard to any scheduled reduction after the 1st 7 contract years. If there is a reduction in benefits under the contract within the 1st 7 contract years, this section shall be applied as if the contract had originally been issued at the reduced benefit level. Any reduction in benefits attributable to the nonpayment of premiums due under the contract shall not be taken into account under subparagraph (A) if the benefits are reinstated within 90 days after the reduction in such benefits. such contract shall be treated as a new contract entered into on the day on which such material change takes effect, and appropriate adjustments shall be made in determining whether such contract meets the 7-pay test of subsection (b) to take into account the cash surrender value under the contract. any increase which is attributable to the payment of premiums necessary to fund the lowest level of the death benefit and qualified additional benefits payable in the 1st 7 contract years (determined after taking into account death benefit increases described in subparagraph (A) or (B) of section 7702(e)(2)) or to crediting of interest or other earnings (including policyholder dividends) in respect of such premiums, and to the extent provided in regulations, any cost-of-living increase based on an established broad-based index if such increase is funded ratably over the remaining period during which premiums are required to be paid under the contract. which provides an initial death benefit of $10,000 or less, and which requires at least 7 nondecreasing annual premium payments, The Secretary may by regulations prescribe rules for taking into account expenses solely attributable to the collection of premiums paid more frequently than annually. a contract provides a death benefit which is payable only upon the death of 1 insured following (or occurring simultaneously with) the death of another insured, and there is a reduction in such death benefit below the lowest level of such death benefit provided under the contract during the 1st 7 contract years, distributions during the contract year in which the failure takes effect and during any subsequent contract year, and under regulations prescribed by the Secretary, distributions (not described in paragraph (1)) in anticipation of such failure. the premiums paid under the contract, reduced by amounts to which section 72(e) applies (determined without regard to paragraph (4)(A) thereof) but not including amounts includible in gross income. If, in order to comply with the requirements of subsection (b), any portion of any premium paid during any contract year is returned by the insurance company (with interest) within 60 days after the end of such contract year, the amount so returned (excluding interest) shall be deemed to reduce the sum of the premiums paid under the contract during such contract year. Notwithstanding the provisions of section 72(e), the amount of any interest returned as provided in subparagraph (B) shall be includible in the gross income of the recipient. The term “contract year” means the 12-month period beginning with the 1st month for which the contract is in effect, and each 12-month period beginning with the corresponding month in subsequent calendar years. Except as otherwise provided in this section, terms used in this section shall have the same meaning as when used in section 7702. Except as otherwise provided in this subsection, the amendments made by this section [enacting this section and amending sections 26 and 72 of this title] shall apply to contracts entered into on or after June 21, 1988 . If the death benefit under the contract increases by more than $150,000 over the death benefit under the contract in effect on October 20, 1988 , the rules of section 7702A(c)(3) of the 1986 Code (as added by this section) shall apply in determining whether such contract is issued on or after June 21, 1988 . The preceding sentence shall not apply in the case of a contract which, as of June 21, 1988 , required at least 7 level annual premium payments and under which the policyholder makes at least 7 level annual premium payments. on or after June 21, 1988 , the death benefit under the contract is increased (or a qualified additional benefit is increased or added) and before June 21, 1988 , the owner of the contract did not have a unilateral right under the contract to obtain such increase or addition without providing additional evidence of insurability, or the contract is converted after June 20, 1988 , from a term life insurance contract to a life insurance contract providing coverage other than term life insurance coverage without regard to any right of the owner of the contract to such conversion. required at least 7 annual level premium payments, is entered into after June 20, 1988 , and before the date of the enactment of this Act [ Nov. 10, 1988 ], and is exchanged within 3 months after such date of enactment for a life insurance contract which meets the requirements of section 7702A(b), In the case of annuity contracts, the amendments made by subsection (d) [amending section 72 of this title ] shall apply to contracts entered into after October 21, 1988 .”