David has been diagnosed with cancer and is expected to live less than 18 months. David is covered by a life insurance policy with a $400,000 face amount. David cashes in the policy early under a special option and receives 80% of the face amount or $320,000. In the year of collection, David will report

Question

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Under the IRS rules, if a person is terminally ill and cashes in a life insurance policy early, the proceeds are generally not considered taxable income. Therefore, David will report no income from the $320,000 received.

David Has Been Diagnosed with Cancer and Is Expected to Live