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If a cash value life insurance policy does not have a valid life insurance purpose, the IRS classifies it as a...

A) Tax-exempt policy
B) Tax-deductible policy
C) Modified endowment contract
D) Annuity policy

User Shahed
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1 Answer

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Final answer:

If a cash value life insurance policy does not have a valid life insurance purpose, it is classified as a Modified Endowment Contract (MEC). A MEC is a life insurance policy that has been funded with more money than the allowable limits set by the IRS, resulting in loss of certain tax benefits and different tax rules.

Step-by-step explanation:

If a cash value life insurance policy does not have a valid life insurance purpose, the IRS classifies it as a Modified Endowment Contract (MEC). Cash-value life insurance policies are designed to provide both a death benefit and a savings component, but a MEC is a policy that has been funded with more money than the allowable limits set by the IRS. When a policy becomes a MEC, it loses certain tax benefits and is subject to different tax rules.

User Charles Zink
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