Cal, age 57, owns a whole life insurance policy with a $750,000 face amount that was paid for with a single premium of $100,000. The current cash value is $125,000. If he were to borrow $30,000 from this policy today, which of the following choices best describes the tax treatment this transaction will receive?
A) $25,000 of the loan is subject to income taxation plus an additional 10% penalty tax.
B) The first $25,000 of the loan is tax-free, but the remaining $5,000 is subject to income taxation.
C) The loan is income tax-free.
D) The first $5,000 of the loan is tax-free, and the remaining $25,000 is subject to income taxation.
Ans: A) $25,000 of the loan is subject to income taxation plus an additional 10% penalty tax.
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