Advanced Underwriting Consultants

Question of the Day – August 17

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: I have heard that withdrawals from a non-MEC life insurance policy are tax-free up to basis, and loans are non-taxable so long as the policy stays in force.  What is the statutory authority for that?

Answer: Revenue Code Section 72(e) governs taxation of distributions from life policies.  Sub-paragraph 5 deals with withdrawals.  Here’s an excerpt with an editorial summary in the parenthesis:

(5) Retention of existing rules in certain cases

(A) In general

In any case to which this paragraph applies …

the amount (of a withdrawal) shall be included in gross income,

but only to the extent it exceeds the investment in the contract.

(C) Certain life insurance and endowment contracts

…  this paragraph  shall apply to any amount not received as an annuity which is

received under a life insurance or endowment contract.

Code Section 72(e)(4) says that loans ARE treated as taxable distributions.

(4) Special rules for application of paragraph (2)(B)

For purposes of paragraph (2)(B) –

(A) Loans treated as distributions

If, during any taxable year, an individual –

(i) receives (directly or indirectly) any amount as a loan

under any contract to which this subsection applies, or

(ii) assigns or pledges (or agrees to assign or pledge) any

portion of the value of any such contract,

such amount or portion shall be treated as received under the

contract as an amount not received as an annuity.


However, Code Section 72(e)(5) says that for life insurance, Code Section 72(e)(4) does not apply.

(5) Retention of existing rules in certain cases

(A) In general

In any case to which this paragraph applies –

(i) paragraphs (2)(B) and (4)(A) shall not apply, and

(ii) if paragraph (2)(A) does not apply,

the amount shall be included in gross income, but only to the

extent it exceeds the investment in the contract.


Therefore, reading these Sections together, loans are not taxable distributions.

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