What are the tax implications of a Modified Endowment Contract (MEC)?

• A. A Term policy with level premiums.
• B. A Modified Endowment Contract; withdrawals and loans are taxed as ordinary income before return of premiums, and penalties may apply if taken before age 59½.
• C. A policy with no tax implications on withdrawals.
• D. A policy where withdrawals are always tax-free.

Answer: (B)