Which of these is NOT subject to income taxation under a Modified Endowment Contract (MEC)?

The death benefit of a life insurance policy, even if classified as a Modified Endowment Contract (MEC), is not subject to income taxation when it is paid out to the beneficiary. This is a fundamental principle of life insurance, where the proceeds from a life insurance policy are generally received by the beneficiary free of federal income tax.

In the case of a MEC, while other transactions, such as loans against the cash value or withdrawals, may incur taxes if the policy's cash value exceeds the premiums paid, the death benefit remains exempt from income taxation. This ensures that the financial protection intended for beneficiaries is preserved and allows for a tax-efficient transfer of wealth upon the insured's death.

Understanding these taxation principles is crucial for policyholders, especially when considering the tax implications of different transactions within their life insurance contracts.