Meg was the beneficiary of a $50,000 life insurance policy when her father died at the end of last year. The insurance company gives her the option of taking the $50,000 as a lump sum immediately or receiving an annuity of $8,000 per year for 12 years beginning in 2018. Meg takes the annuity option. What amount must Meg include in her income in 2018?

Question

Quizplus · Accepted Answer

Meg must include the annual annuity payment of $8,000 in her income for 2018. However, only a portion of it will be taxable. To calculate the taxable portion, Meg must divide the amount contributed to the policy (in this case, $50,000) by the number of payments she will receive (12). This gives her a taxable portion of $4,166.67 per year. Since Meg will receive $8,000 in 2018, she must include $3,833.33 ($8,000 - $4,166.67) in her taxable income for that year.

Meg Was the Beneficiary of a $50,000 Life Insurance Policy