The primary purpose of life insurance has always been to help solve the financial needs caused by premature death. Because of its social value, the law has historically given preferential tax treatment to life insurance—cash value grows tax deferred, lifetime distributions are treated as a nontaxable return of basis first and then as taxable gain, loans are not taxed when taken and death proceeds are generally received income tax free to the beneficiary.
An MEC is a heavily funded life insurance policy which is taxed as an annuity in certain situations. A MEC does not receive all of the tax preferences of life insurance.
As with whole life insurance, the cash value build up of a MEC is tax deferred and the death benefit is income tax free. However, any loans or withdrawals from a MEC will be taxed at the time of withdrawal to the extent of the gain in the policy and may also be subject to a 10% penalty tax.