Betty, age 61, purchased a universal life insurance policy in 2000. In 2005, upon receiving a sizeable inheritance, she paid an exceptionally large annual premium and, in doing so, violated the 7-pay test. The following year, hoping to correct the situation, she made no premium payment so that the average premiums paid were less than the 7-pay test average. Today the policy's cash value stands at $45,000, and her basis in the contract is $28,000. If she were to withdraw $30,000 from the policy's cash value, which of the following best describes the tax treatment this transaction would receive?
$13,000 of the distribution is tax free, but $17,000 is subject to income taxation.