Question

Sam died on January 15, 2010 and left his wife, Terry, an insurance policy with a face value of $100,000. Terry elected to receive the proceeds over a 10-year period ($10,000 plus interest each year). This year Terry receives $11,500 ($10,000 proceeds plus $1,500 interest) from the insurance company. How much income must Terry report from this payment?

Answer 1

Terry must report $1,500 as income from the insurance payment she receives this year, representing the interest portion of the payment.

Step-by-step explanation:

The student asked how much income Terry must report from the insurance payment she receives this year. Since Terry elected to receive the proceeds of the $100,000 insurance policy over a 10-year period, a portion of what she receives each year is structured as interest on the policy. This year, Terry receives $11,500, which is composed of $10,000 from the insurance proceeds and $1,500 as interest. In this scenario, only the interest portion of the receipt is taxable. Therefore, Terry must report $1,500 as income from this payment.

Answer 2

The $1,500 earned in interest

Step-by-step explanation:

According to the IRS, proceeds from a life insurance policy are not included in the taxable income of the beneficiary. If Terry would have chosen to receive the $100,000 in a single payment, she wouldn't have to pay any taxes for that money. Since she decided to receive 10 annual payments plus interest, she must include the earned interest as taxable income.