Question

Carla is the owner and beneficiary of a $300,000 policy on the life of her father. Carla sells the policy to her sister, Paula, for $100,000. Paula later pays premiums of $45,000. Upon her father's death, how much of the insurance proceeds must Paula include in income? A. $0 B. $155,000 C. $45,000 D. $300,000

16) Mary is the beneficiary of a $500,000 insurance policy on her husband's life. She elects to receive $52,000 per year for 10 years rather than receive the entire $500,000 in a lump sum. Of the amount received each year:

   A.  
$5,000 per year is tax free as a death benefit.

    B.  
$52,000 is taxable income.

    C.  
$2,000 is taxable income.

    D.  
$50,000 is taxable income.

Answer 1

Ans:

Generally, life insurance proceeds you receive as a beneficiary due to the death of the insured person, aren't includable in gross income and you don't have to report them.

However, any interest you receive is taxable and you should report it as interest received. See Topic 403 for more information about interest.

If the policy was transferred to you for cash or other valuable consideration, the exclusion for the proceeds is limited to the sum of the consideration you paid, additional premiums you paid, and certain other amounts. There are some exceptions to this rule. Generally, you report the taxable amount based on the type of income document you receive, such as a Form 1099-INT or Form 1099-R

In this case, the income includable in Paula income would be:

Sum Received: $300,000

Less: Purchase price from Sister: $100,000

Less: Premiums Paid: $45,000

SO income would be $155,000/- (Hence option B is correct)