Chapter 16 Questions

Question 1

MEC treatment means policy loans and withdrawals are taxed on a FIFO basis

Answer 1

False. MEC policies are subject to LIFO taxation.

Question 2

It is possible to remove MEC treatment by increasing death benefit

Answer 2

False. Once a policy is a MEC it will always be treated as a MEC.

Question 3

Initially passing the 7-pay test means the policy will never receive unfavorable LIFO taxation.

Answer 3

False. After a material change to the policy is made, it must again pass the 7-pay test.

Question 4

Not all increases in the death benefit after the first seven policy years must make the policy a MEC.

Answer 4

True. Such a material change will re-run the 7-pay test, not convert the policy into a MEC.