Question

Nancy, a widow, elected to receive the proceeds of a $100,000 life insurance policy on the life of her deceased husband in 10 installments of $15,000 each. Her husband had paid premiums of $75,000 on the policy. In the first year, Nancy collected $15,000 from the insurance company. She must include in gross income:

A) $7,500
B) $10,000
C) $15,000
D) $22,500

Answer 1

Nancy must include $7,500 from her first $15,000 life insurance installment in her gross income, as it represents the amount received above the premiums paid by her deceased husband over the number of installments.

Step-by-step explanation:

The question presented requires the determination of the taxable portion of life insurance proceeds received by Nancy. Since Nancy received a $15,000 installment from the life insurance policy and her husband paid a total of $75,000 in premiums, only the amount received that exceeds the total premiums paid by her deceased husband should be included in gross income. The calculation will therefore be the $15,000 received minus the $75,000 total premium, divided by the total number of installments (10), which results in the taxable income of $7,500.

Therefore, Nancy must include $7,500 in her gross income for the year she received the first installment. This is calculated by subtracting the cost basis (total premiums paid) from the installments until the cost basis is fully recovered. Once the cost basis is fully recovered in subsequent years, any additional amounts received would then be fully taxable.