Question

Ben was diagnosed with a terminal illness. His physician estimated that Ben would live no more than 18 months. After he received the doctor's diagnosis, Ben cashed in his life insurance policy and used the proceeds to take a trip to see relatives and friends before he died. Ben had paid $12,000 in premiums on the policy, and he collected $50,000, the cash surrender value of the policy. Henry enjoys excellent health, but he cashed in his life insurance policy to purchase a new home. He had paid premiums of $12,000 and collected $50,000 from the insurance company.

A. Neither Ben nor Henry is required to recognize gross income.
B. Both Ben and Henry must recognize $38,000 ($50,000 - $12,000) of gross income.
C. Henry must recognize $38,000 ($50,000 - $12,000) of gross income, but Ben does not recognize any gross income.
D. Ben must recognize $38,000 ($50,000 - $12,000) of gross income, but Henry does not recognize any gross income.
E. None of these.

Answer 1

Both Ben and Henry must recognize $38,000 ($50,000 - $12,000) of gross income.

Step-by-step explanation:

In the given scenario, Ben cashed in his life insurance policy after being diagnosed with a terminal illness, while Henry cashed in his life insurance policy to purchase a new home. Both Ben and Henry must recognize $38,000 ($50,000 - $12,000) of gross income.

The cash surrender value of a life insurance policy is considered taxable income if it exceeds the amount of premiums paid. Since both Ben and Henry collected $50,000, which is $38,000 more than the premiums they paid, they must each recognize the $38,000 as gross income.

Therefore, the correct answer is B. Both Ben and Henry must recognize $38,000 ($50,000 - $12,000) of gross income.