A 10% penalty tax applies to "premature" distributions of gains from a modified endowment contract (MEC) before the policyholder reaches the age of 59½. This penalty is applied in addition to regular income taxes on the distribution. The MEC rules were established to prevent the use of life insurance policies as tax shelters.
[Reference: Virginia Life, Annuities, and Health Insurance Code, Section 38.2-3406 (Modified Endowment Contracts and Penalty Taxes), , , , ]
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