Question

3. Mary's husband Ben died during the current year. She was the beneficiary of his life insurance policy in the face amount of $300,000. Because Mary likes to go on expensive vacations, she is concerned that she will spend all the money in a few months. She decides to leave the money with the insurance company and will take the money out over a period of ten years. In the current year, Mary receives a check for $34,000 from the insurance company. What are the tax consequences, if any, of this payment to Mary? a. $30,000 of each payment is not taxable and $4,000 is taxable b. $4,000 of each payment is not taxable and $30,000 is taxable c. The entire amount of each payment is excluded from her gross income as life insurance proceeds 1. -.-. tavalla

Answer 1

3..ANSWER:

Generally, proceeds from the life insurance policy, received by the beneficiary/ies,

1. if received as one LUMPSUM, none of the amount is taxable---(so answer option c. will not apply)

2.if received by them as annuity , wherein, the Insurance company pays the annuity along with interest, at the option of the beneficiary(as Mary has opted ,in this case),the excess amount , ie. over the PRINCIPAL , ie.the interest portion ,is taxable, in the hands of the beneficiary.

So that said,

as the unpaid principal goes on decreasing , with every annuitous payment, the interest portion ,out of the total periodic annuity, will also decrease.

So, for this payment alone , $ 4000 is taxable---NOT for each payment.

Please Note :Option d. is not clearly visible, in the question.

But the answer is 30000(the principal portion ,in each payment) is not taxable

& the balance towards interest , on the pending principal , will be taxed as interest income , just like bank & invetsments' interest.