Under MEC rules, which component is generally not taxed when distributed?

• A. Death benefit
• B. Cash value withdrawals
• C. Policy loans
• D. Dividends

Answer: (A)

Under MEC rules, distributions from a life insurance policy are taxed to the extent of the policy’s earnings. The one exception is the death benefit, which typically passes to the beneficiary income-tax-free. That’s why the death benefit is the component generally not taxed when distributed.

Cash value withdrawals and policy loans are treated as distributions and are taxed to the extent of earnings (withdrawals can be taxed as ordinary income because earnings are considered withdrawn first under MEC rules). Dividends are generally treated separately, but the important point for MECs is that distributions other than the death benefit can create tax liability due to earnings.