Nancy, who is 59 years old, is the beneficiary of a $500,000 life insurance poli

Question

Nancy, who is 59 years old, is the beneficiary of a $500,000 life insurance policy. What amount of the insurance proceeds is taxable under each of the following scenarios?

a. She receives the $500,000 proceeds as a lump-sum payment.

b. She receives the proceeds at the rate of $10,500 a month for five years.

c. She receives the proceeds in monthly payments of $2,900 over her remaining life expectancy (assume she will live 25 years).

d. Use the information from (c). If Nancy lives beyond her 25-year life expectancy, what amount of each monthly payment will be taxable in the 26th year?

Explanation / Answer

Solution.

A. proceeds as a lump-sum payment of $500,000 is not taxable.

B. Nancy received total ($10,000 x 12 x 5 ) $630,000 from this amount $500,000 is tax free and $130,000 is reported as interest income. ($130,000 / 5 x 12) $2,167 per month as a interest income.

C. Based her new life expectency. nancy would receive $870,000.from this amount $500,000 is tax free and $320,000 would be taxable as interest income. She would report income of $270,000 / (5x12) = $900 per month.

D. The entire monthly amount reported as tyaxable income.

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