Tax TreatmentQuestion 223 of 716
How is a partial withdrawal from a non-MEC permanent life insurance policy taxed?
a.Gain comes out first as ordinary income (LIFO), as with any life policy
b.The entire withdrawal is income-tax-free up to the policy's full cash value
c.Basis comes out first tax-free (FIFO), then gain as ordinary income
d.The withdrawal is taxed in full at long-term capital gain rates
Explanation
IRC §72(e)(5) gives non-MEC life insurance FIFO ordering: the owner first recovers premiums paid (basis) tax-free, and only amounts above basis are taxed as ordinary income. MEC contracts use the opposite LIFO ordering.
Law Reference: IRC §72(e)(5)This topic, taught in full in the California Life & Health Insurance Producer Exam guide. California Life & Health Insurance Producer Exam — Complete Study Guide (2026) — PDF + EPUB, $19.99 · 14-day refund →
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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)