Taxable income may arise from all of the following modified endowment contract (MEC) transactions EXCEPT for what?

A modified endowment contract (MEC) has specific tax implications, particularly regarding how distributions and withdrawals are treated. When a policy is surrendered for less than the total premiums paid into it, there is no taxable income because the surrender value is still less than the total investment in the contract. In such a situation, the policyholder is essentially reclaiming their own money, resulting in no gain that would be subject to taxation.

In contrast, options such as taking a loan against the policy, cashing it out, or receiving dividends could lead to taxable income. Loans taken against the policy can result in taxable events if the policy lapses or surrenders in the future since the loan may exceed the premiums paid. Cashing out the policy generally leads to a taxable gain to the extent that the cash value exceeds the investment. Even distributions of dividends can be taxable if they exceed the amount of premiums paid into the policy. Therefore, when considering taxable income related to MEC transactions, surrendering for less than what was paid does not produce taxable income, making this option the exception.