Your client wants to take a distribution out of their cash value policy (not a loan). Which of the following statements concerning the tax treatment of the cash value of insurance policies is not correct? Question 22 options: Earnings will come out after all premiums have been distributed. Premiums will come out first If the policy is a MEC, earnings will come out first. The distribution will be taxed as a capital gain and subject to capital gain tax treatment.
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Gina, your 54-year-old client, has a modified endowment contract (MEC) with a basis of $25,000 and a cash value of $50,000. Gina needs to withdraw $10,000 from the MEC to pay the balances of her credit cards. Which of these is a tax consequence of Gina's withdrawal? A) $10,000 is received ordinary income tax free but 10% tax penalty is payable on the withdrawal B) $10,000 short-term capital gain C) $10,000 taxed as ordinary income plus 10% tax penalty on the withdrawal D) $10,000 long-term capital gain
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