| When there is a Material Change to a policy (e.g. a reduction in benefits), the Technical and Miscellaneous Revenue Act of 1988 (TAMRA) legislation requires a new 7 pay premium be calculated, and the new premium be used to retrospectively test the premiums paid into the policy to determine if the material change has caused the policy to become a Modified Endowment Contract (MEC). At face value, it would appear this would require a history of all past premiums paid. However, capturing this single value instead is a "trick" which allows the retrospective premium test to be performed without having the detailed history. The value is defined as the "highest average premium paid" over the life of the policy. It is derived by calculating a running average of the premiums paid into the policy from issue-to-date for each annual duration the policy has been in force, and then selecting the largest of those running averages. That value can then be compared to the newly calculated 7 pay premium. This is a U.S. specific property. |