Final answer:
Switching life insurance policies without tax consequence is allowed under Section 1035 rules, which enable tax-free exchanges of life insurance policies if they are considered like-kind. Other mentioned options, such as MEC rules or Replacement rules, relate to different aspects of insurance regulations. Therefore, correct option is b.
Step-by-step explanation:
Switching life insurance policies without tax consequence is permitted under Section 1035 rules. The Section 1035 exchange, as it is known, allows policyholders to exchange one life insurance policy for another without triggering a taxable event.
This is provided that the exchange is between contracts that are considered like-kind in the eyes of the IRS. For instance, you can exchange a life insurance policy for another life insurance policy, an endowment policy, or an annuity contract without incurring any taxes.
It is important to understand that not all exchanges will qualify, and there are specific regulations that must be adhered to for the transaction to be tax-free.
However, the option a. MEC rules refers to Modified Endowment Contract rules, which deal with the tax treatment of life insurance contracts that fail certain IRS tests on premium payments.
The c. Exclusion Ratio involves how distributions are taxed in relation to investment in the contract versus gains, and d. Replacement rules are generally state regulations governing the replacement of life insurance policies or annuities.