Question
Phil was divorced last year and subsequently sold his $100,000 in-force life insurance policy to his co-worker for its $25,000 cash value. His co-worker named herself as the beneficiary and paid $12,000 in additional premiums for the policy. How much of the $100,000 death benefit, if any, would be taxable income to the beneficiary?
1. $75,000
2. $0
3. $100,000
4. $63,000
1. $75,000
2. $0
3. $100,000
4. $63,000
Answers
GPT-4o mini
To determine how much of the $100,000 death benefit would be taxable income to the beneficiary, we need to consider the basic principles of taxation on life insurance proceeds.
In general, the death benefit from a life insurance policy is not subject to income tax if the policy is paid in a lump sum to the beneficiary. However, if the policy is sold or transferred for value, there can be tax implications.
In this case:
1. Phil sold the life insurance policy to his co-worker for its cash value of $25,000.
2. The co-worker paid an additional $12,000 in premiums.
Now, the amount the co-worker would receive upon Phil's death is the full death benefit of $100,000. However, because the policy was sold for value, the tax rules state that only the portion of the death benefit that is above the amount paid for the policy (including any additional premiums) is taxable.
- The co-worker paid $25,000 for the policy.
- She paid an additional $12,000 in premiums.
- Total cost to the co-worker = $25,000 + $12,000 = $37,000.
To find the taxable amount, we subtract the total cost to the co-worker from the death benefit:
- Taxable portion = Death benefit - Total cost
- Taxable portion = $100,000 - $37,000 = $63,000.
Therefore, the taxable income to the beneficiary would be **$63,000**.
The correct answer is **4. $63,000**.
In general, the death benefit from a life insurance policy is not subject to income tax if the policy is paid in a lump sum to the beneficiary. However, if the policy is sold or transferred for value, there can be tax implications.
In this case:
1. Phil sold the life insurance policy to his co-worker for its cash value of $25,000.
2. The co-worker paid an additional $12,000 in premiums.
Now, the amount the co-worker would receive upon Phil's death is the full death benefit of $100,000. However, because the policy was sold for value, the tax rules state that only the portion of the death benefit that is above the amount paid for the policy (including any additional premiums) is taxable.
- The co-worker paid $25,000 for the policy.
- She paid an additional $12,000 in premiums.
- Total cost to the co-worker = $25,000 + $12,000 = $37,000.
To find the taxable amount, we subtract the total cost to the co-worker from the death benefit:
- Taxable portion = Death benefit - Total cost
- Taxable portion = $100,000 - $37,000 = $63,000.
Therefore, the taxable income to the beneficiary would be **$63,000**.
The correct answer is **4. $63,000**.