Please note that outstanding loans accrue interest. ![]() Loans taken will be free of current income tax as long as the policy remains in effect until the insured's death, does not lapse and is not a MEC. MEC policyholders may be subject to taxes on distributions on an income-first basis, that is, to the extent there is gain in their policies, as well as penalties on any taxable amount if they are not age 59 1/2 or older. If certain limits are exceeded, a MEC results. ![]() The IRS places a limit on how much money can go into life insurance premiums for the policy and how quickly such premiums can be paid in order for the policy to retain all of its tax benefits. Additional amounts are includible in income. Under current federal tax rules, you generally may take income tax-free partial withdrawals under a life insurance policy that is not a modified endowment contract (MEC), up to your basis in the contract. Clients may need to fund higher premiums in later years to keep the policy from lapsing. 1 Policy loans and withdrawals will reduce the cash value and death benefit of the contracts.
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