Fifteen years ago, Lenny purchased an insurance policy on his own life. The policy provides a $3 million death benefit. Lenny has paid $682,000 of premiums, and the cash surrender value of the policy is $725,000. He plans to liquidate the policy to generate cash for his business. If Lenny's marginal tax rate is 35%, how much after-tax cash will the liquidation generate?

Question

Quizplus · Accepted Answer

To calculate the after-tax cash generated from liquidation, we need to determine the taxable gain on the policy. The taxable gain is calculated as the cash surrender value ($725,000) minus the cost basis (total premiums paid $682,000). Therefore, the taxable gain is $43,000. Lenny's marginal tax rate is 35%, so the amount of tax he will owe on the gain is 35% * $43,000 = $15,050. To determine the after-tax cash generated, we subtract the tax owed from the cash surrender value: $725,000 - $15,050 = $709,950. Therefore, the correct answer is B.

Fifteen Years Ago, Lenny Purchased an Insurance Policy on His