New Jersey Life Insurance Exam Practice Question
A modified endowment contract qualifies as life insurance but fails to meet the seven-pay test. Which of the following best describes the result?
Correct Answer: C
Rationale: A modified endowment contract (MEC) still qualifies as life insurance but does not meet the seven-pay test, affecting tax implications.
Option A is incorrect; the policy remains valid, and premiums are not returned. Option B is also wrong; the cash surrender value is not lost but may have tax implications. Option D is misleading; loans against the policy are still allowed but may have tax consequences if the policy is classified as a MEC.
Thus, pre-death distributions are subject to taxation, making option C the most accurate description of the outcome.
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