Your client has a variable universal life policy with a cash value of $150,000. Their basis in the account is $100,000 and they have utilized a loan equal to 90% of the cash value. The loan has yet to be repaid, they are in the 22% marginal tax bracket, and the policy also contains a 10% surrender charge equal to the gross cash value of the policy. The policy unfortunately lapses. What is the net effect for your client?

A)

$15,000 net surrender cash value with $11,000 in long-term capital gains taxes due

B)

$15,000 net surrender cash value with $11,000 in short-term capital gains taxes due

C)

$0 net surrender cash value with $3,300 in ordinary income taxes due

D)

$0 net surrender cash value with $11,000 in ordinary income taxes due