The following statements are about the taxation of life insurance policies that are classified as modified endowment contracts. Select the answer choice containing the correct statement. The proceeds of a modified endowment contract paid in a lump sum following the death of the insured are not considered taxable income to the beneficiary. Distributions from a modified endowment contract during the life of the insured are never subject to taxes or penalties. Policy loans made on modified endowment contracts are not considered taxable income to the policyowner. Upon the surrender of a modified endowment contract, the proceeds are taxable under the cost recovery rule rather than the interest first rule.