Life Insurance FundamentalsQuestion 144 of 716
Single-premium whole life is most likely to be classified as which of the following for federal tax purposes?
a.Annually renewable term life insurance
b.Tax-qualified annuity contract
c.Modified Endowment Contract (MEC)
d.Employer group term insurance
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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PrepPass team · Verified against California Life & Health Insurance License Exam · How we review
Reviewed by John Zihao Zhang — California-Licensed Life Insurance Agent (CA Dept. of Insurance License #4396095 — verify)