Mae Li is beneficiary of a $70,000 insurance policy on her father's life.Upon his death,she elects to receive the proceeds in installments from the insurance company that carries the policy.She will receive $16,000 per year for five years.What are the tax consequences each year?

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Quizplus · Accepted Answer

The $70,000 insurance policy was paid out to Mae Li in five equal installments of $16,000 each. Since the beneficiary did not receive the entire amount in one lump sum, she cannot be taxed on the entire amount in the year of death. Instead, the amount that she receives each year is broken down into two parts: the amount representing the return of her father's cost basis (i.e. the premiums paid by her father) is not taxable, while the amount in excess of her father's cost basis is taxable as ordinary income. Therefore, only the amount in excess of Mae Li's father's cost basis, which is $2,000 ($16,000 - $14,000) would be taxable each year.

Mae Li Is Beneficiary of a $70,000 Insurance Policy on Her