Cameron is the owner and beneficiary of a $300,000 policy on the life of his mother.Cameron sells the policy to his brother,Parker,for $100,000.Parker subsequently pays premiums of $55,000.Upon his mother's death,how much of the insurance proceeds must Parker include in income?

Question

Quizplus · Accepted Answer

Parker must include the full $300,000 of insurance proceeds in his income because he purchased the policy for less than the death benefit, thus creating a taxable event. However, he can reduce the taxable amount by the cost basis in the policy, which includes the premiums he paid ($55,000) and the purchase price ($100,000), for a total cost basis of $155,000. Therefore, the taxable amount would be $300,000 - $155,000 = $145,000.

Cameron Is the Owner and Beneficiary of a $300,000 Policy