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A life insurance policy that fails the 7-pay test is considered by the irs to be a modified endowment contract. this type of policy will

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This type of policy will change living benefits to taxable as ordinary income, in contrast to non-taxable living benefits that are found in life insurance.

A modified endowment contract (MEC) refers to a tax requirement of a life insurance policy where the policy has been financed with more money than the money which is accepted under federal laws.

Kalahira
A Modified endowment contract, MEC, allows individuals to put large sums of money into a cash value policy which allows the cash to grow under a tax deferment until the insured person dies, then the death benefit will be paid with no income taxes.

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