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 2019.Meg takes the annuity option.What amount must Meg include in her income in 2019?

Question

Quizplus · Accepted Answer

The amount Meg must include in her income is the difference between the annuity payment received and the excluded part of the payment, which is calculated based on the investment in the contract divided by the expected return. The excluded part is the portion of the annuity payment that is considered a return of the investment in the contract (the $50,000). The expected return is the total amount she expects to receive from the annuity ($8,000 x 12 = $96,000). Therefore, each year, she can exclude $50,000 / $96,000 of each payment from her income. In 2019, she receives $8,000, so the excluded part is $8,000 x ($50,000 / $96,000) = $4,167. The amount included in income is $8,000 - $4,167 = $3,833.

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