Variable Life
An investor withdraws $10,000 from a VUL policy with $40,000 cost basis and $70,000 cash value. How is it taxed?
Life Insurance uses FIFO (cost basis out first = tax-free first). Annuities use LIFO (earnings out first = taxable first). This is a common exam distinction!
Complete Analysis & Legal Rationale
Life insurance withdrawals follow FIFO taxation. Since $10,000 is less than the $40,000 cost basis, it is entirely tax-free.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
Does not match the governing concept in the explanation.
Matches the verified teaching point in the explanation.
Does not match the governing concept in the explanation.
Does not match the governing concept in the explanation.
Official Standard: Outline-level citation pending rule-specific upgrade. Verify against current FINRA Series 7 outline.