Question

The owner of a life insurance policy has decided to surrender the life insurance policy to the insurer. Since inception of the life insurance contract, the owner has paid premiums of $100,000 and received cash policy dividends equal to $20,000. If at the surrender date, the owner receives a cash payment of $140,000 from the insurer, what is his gain/ loss subject to income tax on the life insurance policy?

Answer 1

$60,000

Step-by-step explanation:

Data provided in the question:

Premiums paid = $100,000

Cash policy dividends received = $20,000

Cash surrender value = $140,000

Now,

The owners adjusted basis in the property

= Premiums paid - Cash policy dividends received

= $100,000 - $20,000

= $80,000

Therefore,

The gain on the policy = Cash surrender value - owners adjusted basis

= $140,000 - $80,000

= $60,000