CIC Life & Health Practice Questions - CIC Life And Health Institute Exam

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A policy fails the 7-pay test under IRC Section 7702A. As a result, the policy is treated as a Modified Endowment Contract (MEC). Which statement about a MEC is TRUE?

Death benefits paid to beneficiaries become taxable as ordinary income Lifetime distributions, including loans, are taxed LIFO and may incur a 10% penalty before age 59 1/2 The policy automatically converts back to non-MEC status after 7 years MECs lose all life insurance protection upon classification

Correct Answer:

Lifetime distributions, including loans, are taxed LIFO and may incur a 10% penalty before age 59 1/2

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