Life Insurance FundamentalsQuestion 144 of 315
Single-premium whole life is most likely to be classified as which of the following for federal tax purposes?
a.Term insurance
b.Group insurance
c.Tax-qualified annuity
d.Modified Endowment Contract (MEC)
Explanation
Funding a permanent life policy with a single large payment usually fails the IRC §7702A 'seven-pay test,' classifying it as a Modified Endowment Contract. While the death benefit remains income-tax-free, withdrawals and loans are taxed less favorably (LIFO basis, possible 10% penalty before age 59½).
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