Retirement and Other Insurance Concepts
A policy fails the seven-pay test and becomes a modified endowment contract. How are its living distributions taxed?
Answer and explanation
Answer: D. A MEC loses the favorable FIFO treatment. Loans, withdrawals, and assignments are taxed LIFO, gain first, and a 10 percent penalty may apply before age 59 1/2. The death benefit stays income-tax free.Source: Internal Revenue Service — IRS Pub. 525, modified endowment contracts and the seven-pay test
More retirement and other insurance concepts questions
- Which of these is a cash need rather than a continuing income need in a personal needs analysis?
- Who makes contributions to a Simplified Employee Pension (SEP) IRA plan, and how are they taxed?
- Why do insurers generally require a higher participation percentage in a contributory group life plan than in a noncontributory plan?
- A client considering a life settlement asks what he should weigh before selling. Which point is most important to raise?
- A client wants survivors to receive income for thirty years and does not mind if the fund is exhausted at the end. Which approach fits?
- A closely held corporation funds a buy-sell agreement so that the company itself buys a deceased shareholder's stock. What is this plan called?
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