Ben was diagnosed with a terminal illness.His physician estimated that Ben would live no more than 18 months. After he received the doctor's diagnosis, Ben cashed in his life insurance policy and used the proceeds to take a trip to see relatives and friends before he died.Ben had paid $12,000 in premiums on the policy, and he collected
$50,000, the cash surrender value of the policy.Henry enjoys excellent health, but he cashed in his life insurance policy to purchase a new home.He had paid premiums of $12,000 and collected $50,000 from the insurance company.

Question

Quizplus · Accepted Answer

Under U.S. tax law, the proceeds from cashing in a life insurance policy are generally taxable to the extent they exceed the premiums paid. However, there is an exception for terminally or chronically ill individuals who sell their life insurance policy under a viatical settlement. In Ben's case, because he is terminally ill, he would not recognize any gross income from cashing in his life insurance policy. Henry, being in excellent health and cashing in his policy for personal reasons, must recognize the $38,000 as gross income.

Ben Was Diagnosed with a Terminal Illness