Tax TreatmentQuestion 233 of 315
While a non-MEC life insurance policy remains in force, how is an outstanding policy loan treated for federal income tax purposes?
a.It is taxable as ordinary income to the extent the loan exceeds basis
b.It is not a taxable distribution because the owner is obligated to repay
c.It is taxable as a long-term capital gain
d.It is taxable as a deemed dividend regardless of policy gain
Explanation
A loan from a non-MEC life insurance policy is not a distribution and is not taxable while the contract stays in force. If the policy lapses or is surrendered with the loan outstanding, the unpaid loan is treated as a deemed distribution and any gain above the owner's basis becomes ordinary income.
Law Reference: IRC §72(e)Practice all 315 questions free — no signup required.
Related questions on this topic
- Which of the following BEST keeps a life insurance death benefit out of the insured's federal gross estate?
- Which statement BEST describes the federal tax treatment of a Health Savings Account (HSA)?
- An investor purchases an existing $500,000 life insurance policy from the original owner for $40,000 and continues to pay $5,000 in annual premiums until the insured dies five years later. The investor is NOT one of the exempt transferees listed in §101(a)(2). How much of the $500,000 death benefit is taxable to the investor as ordinary income?
- How are benefits paid from a tax-qualified long-term care insurance contract generally treated for federal income tax?
- Which statement about the federal tax treatment of a Modified Endowment Contract (MEC) is TRUE?
- A policyowner wants to exchange a $50,000 cash-value whole life policy for a non-qualified deferred annuity. Which statement about the tax treatment is correct?
Last reviewed: · editorial process
PrepPass Editorial Team · Verified against California Life & Health Insurance License Exam · How we review