Question

Which of the following would be taxable annually if $100,000 of life insurance proceeds were used in a settlement option that paid $13,000 per year for ten years?

A) The entire $13,000
B) A portion of the $13,000
C) None of the $13,000
D) The remaining balance after ten years

Answer 1

A portion of the $13,000 from the life insurance proceeds paid each year through a settlement option would be taxable annually, which represents the interest earned on the principal amount.

Step-by-step explanation:

When considering what portion of life insurance proceeds paid out as a settlement option might be taxable annually, it is important to understand the principle of exclusion for life insurance payouts. Generally, life insurance proceeds paid out upon the death of the insured are not taxable income to the beneficiary. However, when these proceeds are used in a settlement option, the portion that represents interest on the original amount is taxable.

If $100,000 of life insurance proceeds are used in a settlement option that pays $13,000 per year for ten years, a portion of each $13,000 payment would indeed be taxable. Specifically, the interest earned on the $100,000 would be taxable. The principal amount (up to $100,000 in this case) spread out over ten years would not be taxable. Thus, the answer is B) A portion of the $13,000.