How does the 7-pay test work?


The 7-pay test is highly technical and involves sophisticated actuarial calculations based on the specific facts of a particular case, i.e., policy type, face amount, the insured’s age, etc. The starting point is for the insurance company to determine the annual net level premium payment that would be required each year if the contract provided for paid-up future benefits after the payment of seven level annual premiums. That sets the limit on annual premium payments within the 7-pay test. Example: The 7-pay test is violated if at any time during the first seven contract years the accumulated amount paid under the contract exceeds the sum of those net level premium that would have been paid on or before such time. Example: Let’s say the net level premium to provide for paid-up benefits after seven years was $20,000. If after three years the owner had contributed more than $60,000 to the contract, the 7-pay test would be violated and the contract would become a MEC. Once a contract beco