Which of the following is a characteristic of a modified endowment contract?

A modified endowment contract (MEC) is designed with more aggressive funding than a typical life insurance policy, specifically because it allows for faster accumulation of cash value. The key characteristic of a MEC is that the total premiums paid during the first seven years exceed the maximum limit permitted for a life insurance policy without it being classified as a MEC. This classification occurs when payments in the early years exceed the net level premiums, which is the basis for the overfunding.

This characteristic has important implications for policyholders, as MECs lose certain tax advantages typically associated with life insurance policies; for example, distributions taken from the policy may be subject to taxation in a way that standard life insurance would not be.

The other options, while they may apply to certain policies, do not specifically define a modified endowment contract in the same manner. Flexible premiums may apply to various types of policies, permanent coverage is a feature of whole life insurance instead, and the investment component is common in many life insurance contracts but does not specifically define MECs. Hence, the unique nature of the overfunding in the initial years is what makes this characteristic definitive for modified endowment contracts.