Question

When Betty was diagnosed as having a terminal illness, she sold her life insurance policy to Insurance Purchase, Inc., a company that is licensed to invest in these types of contracts. Betty sold the policy for 32,000 and Insurance Purchase, Inc., became the beneficiary. She had paid total premiums of 19,000. Betty died 8 months after the sale. Insurance Purchase, Inc., collected 50,000 on the policy. The company had paid additional premiums of 4,000 on the policy. Betty is not required to recognize a 13,000 gain from the sale of her life insurance policy and Insurance Purchase, Inc., is required to recognize a 14,000 gain from the insurance policy. What was the total gain recognized by Insurance Purchase, Inc., from the insurance policy?

1) 13,000
2) 14,000
3) 17,000
4) 18,000

Answer 1

The total gain recognized by Insurance Purchase, Inc., from Betty's insurance policy is the difference between the death benefit collected and their total investment in the policy, amounting to $14,000. Therefore, the correct option is 2).

Step-by-step explanation:

To determine the total gain recognized by Insurance Purchase, Inc., from the insurance policy held by Betty, we must calculate the difference between the amount the company received from the insurance policy upon Betty's death and the total investment the company made into the policy. Insurance Purchase, Inc. collected $50,000 on the policy and had paid $4,000 in additional premiums after purchasing the policy from Betty for $32,000.

The total amount invested by the company in the policy was $32,000 (initial purchase) + $4,000 (additional premiums), totaling $36,000. The gain recognized is the death benefit collected minus the total investment, $50,000 - $36,000, which equals $14,000. Therefore, the correct option for the total gain recognized by Insurance Purchase, Inc., is option 2: $14,000.