Question

Albert had a terminal illness that would require almost constant nursing care for the remaining two years of his estimated life, according to his doctor. Albert had a life insurance policy with a face amount of $100,000. He had paid $25,000 of premiums on the policy. The insurance company has offered to pay him $80,000 to cancel the policy, although its cash surrender value was only $55,000. He accepted the $80,000. Albert used $15,000 to pay his medical expenses. Albert made a miraculous recovery and lived another 20 years.
Required:
What are the tax consequences for Albert when he cashed out the policy?

Answer 1

Answer:

Albert is not required to recognize any gross income because of his terminal illness.

Explanation:

There will be no such tax consequence for Albert when he cashed out the policy. This is because of the fact that he qualified for death benefit exclusion for his Life insurance policy