Fifteen years ago, Lenny purchased an insurance policy on his own life. The policy provides a $3 million death benefit. Lenny has paid $682,000 of premiums, and the cash surrender value of the policy is $725,000. He plans to liquidate the policy to generate cash for his business. If Lenny's marginal tax rate is 35%, how much after-tax cash will the liquidation generate?

Question

Quizplus · Accepted Answer

To calculate the after-tax cash generated from the liquidation, we need to subtract the taxes owed on the gain from the cash surrender value. The gain is calculated by subtracting the premiums paid from the cash surrender value: $725,000 - $682,000 = $43,000. The taxable gain is the lower of the gain or the policy's death benefit, which is $3 million. Therefore, the entire $43,000 gain is subject to taxation. Lenny's marginal tax rate is 35%, so he will owe $15,050 ($43,000 x 0.35) in taxes. The after-tax cash generated from the liquidation is the cash surrender value minus the taxes owed: $725,000 - $15,050 = $734,950. Therefore, the best choice is B, $734,950.

Fifteen Years Ago, Lenny Purchased an Insurance Policy on His