CARD Q061
A modified endowment contract (MEC) has $12,000 of gain. Its owner takes a $7,000 policy loan. Ignoring any additional tax, how much is generally included in income?
- $5,000
- $12,000
- $7,000
- $0
$7,000
MEC loans are generally treated as distributions, with gain coming out first. The taxable amount here is limited to the $7,000 distributed.
Why each choice is right or wrong
A. $5,000
Incorrect. $5,000 is gain remaining after the $7,000 distribution, not the taxable loan amount.
B. $12,000
Incorrect. The full gain is not all distributed by a $7,000 loan.
C. $7,000
Correct. MEC loans are generally treated as distributions, with gain coming out first. The taxable amount here is limited to the $7,000 distributed.
D. $0
Incorrect. MEC loans generally receive distribution treatment to the extent of gain.
Review the related terms
Use these lessons to revisit the concepts and try additional practice questions.