FIFO taxation ("first-in, first-out") describes the ordering rule for withdrawals from non-MEC life insurance policies, where basis (premiums paid) is deemed withdrawn before gain. As a result, early withdrawals can be tax-free up to basis, while loans may be tax-free if the policy remains in force. MECs and annuities use different, less favorable ordering rules.

Advisors explain that non-MEC withdrawals come out on a FIFO basis-return of basis first-helpful for funding college or emergencies without current tax. They caution that loans and withdrawals must be managed to avoid lapse and unexpected tax.