How are lifetime distributions from MEC policies taxed differently from lifetime distributions from non-MEC policies?
There are three major differences: LIFO Tax Treatment Lifetime distributions from MECs are taxed on a “last in-first out” or “LIFO” basis. This means that distributions from MECs are treated as first coming out of the gain portion of the contract, if any, and therefore distributions are taxable to the extent of any gain in the contract. By contrast, lifetime distributions from non-MEC policies are taxed on a more favorable “first in-first out” or “FIFO” basis. Such distributions are treated as first coming out of the policy’s cost basis and are taxable only after the policy’s cost basis has been fully recovered. It should be noted that even when a policy is a MEC, if there is no gain in the contract at the time of a policy distribution, there is no taxable income from the distribution. In other words, the MEC rules do not “create” taxable income in a contract that does not have any gain in the contract. Loans Treated as Distributions Loans from MECs are treated as distributions and thu
