Does surrendering a whole life policy that was not previously a MEC cause it to become a MEC?
In October 1988 I signed up for a whole life policy. I paid my monthly premiums for many years with the understanding that I could take out cash (cash value or dividends) up to the amount of premiums I had paid without any tax consequences and that anything I took out beyond the amount of premiums I paid would be taxable.
In May 2006 I decided to surrender my policy. The insurance company sent me a check and a letter. The new letter said that by surrendering my policy I had turned it into a MEC and since I was less than age 59-1/2 the 10% tax penalty would apply to my taxable gain. Later the insurance company sent me and the IRS a form 1099-R (Distribution from pensions, annuities, retirement or profit sharing plans, IRAs, insurance contracts, etc.) showing the gross distribution (box 1), taxable amount (box 2A), and distribution code 1 (box 7) "early distribution, no known exception (under age 59-1/2)".
I have looked at everything I could find on the internet about MECs. I have read about the 7 year test and material changes. I passed the initial 7 year test. I never did anything with my policy other than pay the monthly premium until I surrendered it so I don't think I had a material change to my policy before I surrendered it. Did surrendering my policy turn it into a MEC (and thereby make my gain subject to the additional 10% tax)? If so, how and why?
Thanks
Jornal
In October 1988 I signed up for a whole life policy. I paid my monthly premiums for many years with the understanding that I could take out cash (cash value or dividends) up to the amount of premiums I had paid without any tax consequences and that anything I took out beyond the amount of premiums I paid would be taxable.
In May 2006 I decided to surrender my policy. The insurance company sent me a check and a letter. The new letter said that by surrendering my policy I had turned it into a MEC and since I was less than age 59-1/2 the 10% tax penalty would apply to my taxable gain. Later the insurance company sent me and the IRS a form 1099-R (Distribution from pensions, annuities, retirement or profit sharing plans, IRAs, insurance contracts, etc.) showing the gross distribution (box 1), taxable amount (box 2A), and distribution code 1 (box 7) "early distribution, no known exception (under age 59-1/2)".
I have looked at everything I could find on the internet about MECs. I have read about the 7 year test and material changes. I passed the initial 7 year test. I never did anything with my policy other than pay the monthly premium until I surrendered it so I don't think I had a material change to my policy before I surrendered it. Did surrendering my policy turn it into a MEC (and thereby make my gain subject to the additional 10% tax)? If so, how and why?
Thanks
Jornal