Meg was the beneficiary of a $50,000 life insurance policy when her father died at the end of 2011.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 2013.Meg takes the annuity option.What amount must Meg include in her income in 2013?

Question

Quizplus · Accepted Answer

Meg does not include the full $8,000 in her income because a portion of each annuity payment is considered a return of principal (the $50,000 she initially received). To determine the amount that Meg must include in her income in 2013, we need to first calculate the exclusion ratio.

Exclusion Ratio = Investment in Contract / Expected Return

Investment in Contract = $50,000
Expected Return = $8,000 x 12 years = $96,000

Exclusion Ratio = $50,000 / $96,000 = 0.5208

So, Meg can exclude 52.08% of each annuity payment from her income, and must include the remaining 47.92%.

2013 Annuity Payment = $8,000 x 1 year = $8,000
Amount to Include in Income = $8,000 x 0.4792 = $3,833

Therefore, Meg must include $3,833 in her income in 2013.

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