Which of these is NOT subject to income taxation under a Modified Endowment Contract (MEC)?

• A. Death benefit
• B. Cash value withdrawals
• C. Policy dividends
• D. Loans against the policy

Answer: (A)

When a life insurance policy becomes a Modified Endowment Contract, the tax treatment of accessing the cash value changes: withdrawals and loans are generally taxed to the extent they contain earnings. The one thing that stays tax-free, regardless of MEC status, is the death benefit paid to the beneficiary. So, the death benefit is not subject to income taxation under a MEC. The other options can trigger taxes: withdrawals are taxed as ordinary income to the extent of the policy’s gains, loans are not taxed while the policy remains in force but can create tax consequences if the policy lapses with a loan outstanding, and dividends are typically non-taxable as a return of premium unless other tax rules apply. The key point is that the death benefit remains income-tax-free.