Question

Fifteen years ago, Lenny purchased an insurance policy on his own life. The policy provides a $3 million death benefit. Lenny has paid $682,000 of premiums, and the cash surrender value of the policy is $725,000. He plans to liquidate the policy to generate cash for his business. If Lenny's marginal tax rate is 35%, how much after-tax cash will the liquidation generate

Answer 1

Lenny will generate $471,250 after-tax cash.

What is an insurance policy?

• The insurance policy, which establishes the claims that the insurer is legally obligated to pay, is a contract between the insurer and the policyholder.
• The insurer guarantees to reimburse losses brought on by risks covered by the policy language in return for an upfront payment known as the premium.

What is a cash surrender value?

• If a policyholder or the owner of an annuity contract chooses to cancel their policy before it matures or an insured event occurs, the insurance company will give them the cash surrender value as compensation.

Solution -

Money Lenny will get = $725,000.

Subtract the tax to find the money Lenny will get.

35% of 725,000 = $253,750.

$725,000 - 253,750 = 471,250$

Therefore, Lenny will generate $471,250 after-tax cash.

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