Question

Life Insurance ProceedsDon is the beneficiary of a $50,000 insurance policy on the life of his mother, Anna. To date, Anna paid premiums of $16,000. What amount of gross income must be reported in each of the following cases?a. Anna elects to cancel the policy and receives $20,000, the cash surrender value of the policy.b. Anna dies and Don receives the face amount of the policy, $50,000.c. Anna dies and Don elects to receive $15,000 per year for four years.

Answer 1

Answer:

The amount of gross income must be reported in each of the following cases is:

a. Anna elects to cancel the policy and receives $20,000.

=20,000-16000

4000.

b. Anna dies and Don receives the face amount of the policy, $50,000.

0, (not taxable).

c. Anna dies and Don elects to receive $15,000 per year for four years.

(interest paid out over time (15,000 x 4) - 50,000)

10,000.

Answer 2

Answer:

a. $4,000

b. The $50,000 is a non taxable income

c. $2,500 per year. And $10,000 in total for the four years.

Explanation:

a. Anna elects to cancel the policy and receives $20,000, the cash surrender value of the policy.

This is obtained by deducting the $16,000 premiums paid to date by Anna from the $20,000 she receives as follows:

Gross income = $20,000 - $16,000 = $4,000

b. Anna dies and Don receives the face amount of the policy, $50,000.

Since the face amount of the policy is received, the $50,000 it is not taxable because not interest is earned.

c. Anna dies and Don elects to receive $15,000 per year for four years

This is obtained by deducting the face monthly amount from the actual monthly amount Don elected to receive to obtain the taxable interest as follows:

Taxable interest = $15,000 - ($50,000 ÷ 4) = $15,000 - $12,5000 = $2,500

Taxable interest for Four years =  $2,500 × 4 = $10,000.