Question

Bob's life insurance policy cash value is $10,000 and he has paid $8,000 in premiums. He now wants to surrender the policy for its cash value. How much is considered taxable?

a) $0
b) $8,000
c) $2,000
d) $10,000

Answer 1

The taxable amount when Bob surrenders his life insurance policy for its cash value is $2,000, which is the gain from the policy that exceeds the amount of premiums paid.

Step-by-step explanation:

When Bob surrenders his life insurance policy for its cash value, the amount of money that is considered taxable is the difference between the cash value of the policy and the premiums he has paid into it. In this case:

• Cash value of the policy: $10,000
• Total premiums paid: $8,000

The taxable amount is calculated by subtracting the premiums paid from the cash value. Therefore, the taxable amount would be $10,000 - $8,000 = $2,000. This is the gain from the policy, and since it exceeds the amount of premiums paid, it is considered taxable income.

The taxable amount when Bob surrenders his life insurance policy for its cash value is $2,000.