With a Modified Endowment Contract, or MEC, distributions (including policy loans) are subject to income tax to the extent that the gross cash value of the policy exceeds the policy owner's basis in the contract. In addition, a penalty of __________ may also apply if the distribution was made prior to the recipient attaining the age of 59 ½.
Explanation
Answer: C - With a Modified Endowment Contract, or MEC, distributions (including policy loans) are subject to income tax to the extent that the gross cash value of the policy exceeds the policy owner's basis in the contract. In addition, a penalty of 10% may also apply if the distribution was made prior to the recipient attaining the age of 59 ½. Due to their tax advantaged elements, the funds that are withdrawn from a MEC prior to the policy owner reaching age 591/2 would be considered an "early withdrawal," similar to withdrawals from qualified retirement plans.
