MEC Income Tax Ramifications

Lauren paid $50,000 for a MEC policy when she was 50 years old. What are the income tax ramifications if she takes a $10,000 loan 5 years after purchasing the policy? The policy was worth $58,000 at the time of the loan.

1. Lauren would not have to report any taxable income or penalty.
2. Lauren would have to $8,000 of ordinary income and a 10% penalty.
3. Lauren would have to report $10,000 of ordinary income and a 10% penalty.
4. Lauren would have to report $10,000 of ordinary income but no penalty.