Tax TreatmentQuestion 707 of 716
The main tax disadvantage of a Modified Endowment Contract (MEC) is that:
a.The premiums the owner pays into the contract suddenly become fully tax-deductible on the owner's personal income tax return
b.The death benefit becomes taxable
c.Living distributions such as loans and withdrawals are taxed on a LIFO basis, with a possible 10% penalty before age 59 1/2
d.It can no longer pay policy dividends
Explanation
A MEC loses favorable living-benefit treatment: loans and withdrawals are taxed earnings-first (LIFO) and may carry a 10% penalty before 59 1/2. The death benefit itself remains income-tax-free.
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 →
Practice all 716 questions free — no signup required.
Own the complete California Life & Health Insurance Producer Exam guide — PDF + EPUB, $19.99 →
Related questions on this topic
- Accelerated death benefits paid to an insured who has been certified as terminally ill are generally:
- A Section 1035 exchange permits a tax-free transfer between:
- Which 1035 exchange is NOT permitted on a tax-free basis?
- The general rule that life insurance death proceeds are income-tax-free can be lost under the 'transfer-for-value' rule when the policy is:
- When death proceeds are left with the insurer and paid to the beneficiary in installments, the portion that is taxable is the:
- Premiums paid for personal life insurance are:
Last reviewed: · editorial process
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)