Final answer:
If a cash value life insurance policy does not have a valid life insurance purpose, it is classified as a Modified Endowment Contract (MEC). A MEC is a life insurance policy that has been funded with more money than the allowable limits set by the IRS, resulting in loss of certain tax benefits and different tax rules.
Step-by-step explanation:
If a cash value life insurance policy does not have a valid life insurance purpose, the IRS classifies it as a Modified Endowment Contract (MEC). Cash-value life insurance policies are designed to provide both a death benefit and a savings component, but a MEC is a policy that has been funded with more money than the allowable limits set by the IRS. When a policy becomes a MEC, it loses certain tax benefits and is subject to different tax rules.