Final answer:
The 7-pay test is used to determine if a life insurance contract qualifies as a modified endowment contract by comparing the amounts paid into the policy with the standard level premium amounts within the first seven years.
Step-by-step explanation:
The test employed to assess whether a life insurance contract qualifies as a modified endowment contract (MEC) is known as the 7-pay test. This test compares the total amount of premiums paid into the policy by the end of the 7th year to the total amount of net level premiums that would have paid on or before the end of the 7th year, based on standard level premium paying life insurance of the same death benefit. If the premiums paid exceed this limit, the policy is classified as a MEC, which has different tax implications from a standard life insurance contract.