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harkovskaia [24]
3 years ago
10

Several years ago, Diego purchased a $400,000 whole life insurance policy on his life. He has paid cumulative premiums over the

years of $20,000 and has accumulated a cash value of $25,000. This year, he was diagnosed with a rare liver disease, and, as a result, his life expectancy is only six months. Because of his large medical costs, he is considering selling his policy to a viatical settlement company. The company has offered him $250,000 for the policy. He would also like to explore other ways to generate cash from the policy. Which of the following statements regarding Diego's situation are CORRECT?
I. If Diego sells his policy to the viatical settlement company, he will be taxed on any gain from the sale if he dies more than two years later.
II. If the viatical company collects the death benefit as a result of Diego's death, the proceeds will be tax free to the company.
III. If Diego sold the policy to his cousin for $250,000, his cousin would be subject to ordinary income tax on a portion of the life insurance benefit when Diego dies.
IV. If Diego takes a loan from the policy, some or all of the loan will be subject to ordinary income tax if the policy is classified as a modified endowment contract (MEC).

a. I and II
b. III and IV
c. I, II, and IV
d. II and III
Business
1 answer:
MArishka [77]3 years ago
7 0

Answer:

b. III and IV

Explanation:

Diego has expected life of 6 month due to his liver disease. He wants to sell his life insurance policy to a company. If he sells the policy, when Diego dies the company will receive all the benefit and will be taxed at ordinary income tax rate. The proceeds are not tax free. In case if Diego sells the policy to his cousin, he will also be taxed on proceed. The tax will be ordinary income tax on the benefit from life insurance policy.

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