A Modified Endowment Contract is created under which circumstance?

A Modified Endowment Contract (MEC) is created when the total premiums paid into a life insurance policy exceed the limit set by the seven-pay test. The seven-pay test determines whether a policy behaves like a life insurance contract or an investment by calculating the total premiums that would have been paid during the first seven years of the policy. If premiums exceed this amount, the IRS considers the policy to be primarily an investment vehicle rather than a pure life insurance policy, leading to different tax implications.

In this context, option B highlights that once the total premiums exceed the threshold established by the seven-pay test, the policy is classified as a MEC. This designation affects the way withdrawals and loans are taxed, making it crucial for policyholders to be aware of their premium payments in relation to this standard.

The other options do not pertain to the conditions that define a MEC. The lapse of a policy after a certain period does not indicate a modification in its treatment or classification. Similarly, the timing of the insured's death does not influence whether a policy is considered a MEC, nor does converting a policy to a term policy affect the MEC status. The creation of a MEC is specifically tied to the premium payment limits established by tax law.