Withdrawals from a MEC are taxed in which manner?

• A. They are taxed on the last dollars first (earnings) and may incur penalties before age 59½.
• B. They are tax-free.
• C. They are taxed only when the policy matures.
• D. They are taxed on a pro rata basis depending on premium payments.

Answer: (A)

A MEC distributes taxes on a last-in, first-out basis. When you take money out, the IRS treats the withdrawal as coming first from the policy’s earnings, which are taxed as ordinary income. Because those earnings are being withdrawn before any return of the original premiums (the basis), you don’t get tax-free treatment on the full amount. If you’re under age 59½, the taxable portion typically faces an additional 10% early withdrawal penalty unless an exception applies. This combination—taxing earnings first and possible penalties before 59½—is what makes withdrawals from a MEC different from regular life insurance or other funding that isn’t a MEC. The other choices don’t fit because MEC withdrawals are not tax-free, aren’t taxed only at maturity, and aren’t allocated pro rata to premium payments.