Question

which of the following statements regarding the taxation of modified endowment contracts is false? a. accumulations are tax deferred. b. policy loans are taxable distributions. c. distributions before age 59 1/2 incur a 10% penalty on policy gains. d. withdrawals are not taxable.

Explanation:

1. In Modified Endowment Contracts (MECs), accumulations grow on a tax - deferred basis, so option A is true.
2. Policy loans from MECs are not taxable distributions, which makes option B false.
3. Distributions before age 59 1/2 generally incur a 10% penalty on policy gains, so option C is true.
4. Withdrawals from MECs are taxable to the extent of policy gains, so option D is false.

Answer:

B. Policy loans are taxable distributions, D. Withdrawals are not taxable.