Question

Carla is the owner and beneficiary of a $300,000 policy on the life of her father. Carla sells the policy to her sister, Paula, for $100,000. Paula later pays premiums of $45,000. Upon her father's death, how much of the insurance proceeds must Paula include in income?

A. $0
B. $155,000
C. $45,000
D. $300,000

Answer 1

Option B.

$155,000

Step-by-step explanation:

Expenses:

Amount at which Paula bought the insurance policy from her father:

$100,000

Total amount of premium Paula pays for insurance policy:

$45,000

Hence, the total amount of money spent on the insurance policy is $100,000 + $45,000 = $145,000

Income:

Amount paid to Paula upon her father's death:

$300,000

To get the value of the insurance proceeds Paula must include as income, we subtract her expenses on the insurance policy from the total amount paid to her by the insurance company.

income = $300,000 - $145,000 = $155,000

Upon Paula's Fathers death, she should include $155,000 as her income