Question

Bentley has paid $40,000 in premiums on a whole life policy with a $250,000 death benefit. the policy has paid a dividend of $1,000 per year for the past 10 years. if bentley surrenders the policy today for it's cash value of $55,000, what will be the amount of gain subject to taxation

a. $0.
b. $15,000.
c. $25,000.
d. $55,000

Answer 1

Tje correct answer is option a. Bentley would have no taxable gain upon surrendering the whole life insurance policy, as the cash value is less than the total of premiums paid and dividends received.

Step-by-step explanation:

The question concerns a whole life insurance policy and the taxation of its cash surrender value. Bentley has paid $40,000 in premiums on a policy with a $250,000 death benefit and received $1,000 dividends annually for 10 years.

Upon surrendering the policy for its cash value of $55,000, the gain subject to taxation must be calculated. The cash value ($55,000) minus the total premiums paid ($40,000) and the dividends received ($10,000) equals $5,000, which is not taxable since it is less than the premiums paid. Thus, the correct answer is:

a. $0.