California Insurance License Exam Practice Test Practice Question
What is the penalty tax imposed on amounts received from a modified endowment contract?
Correct Answer: A
Rationale: A penalty tax of 10% is imposed on amounts received from a modified endowment contract (MEC) if withdrawn before the policyholder reaches age 59½. This reflects the IRS's intention to discourage early access to these funds.
Options B (15%), C (20%), and D (25%) are incorrect as they do not align with IRS regulations regarding MECs. Each of these percentages exceeds the established penalty, leading to potential confusion. Understanding the specific 10% penalty is crucial for policyholders to make informed financial decisions regarding their MECs.
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