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 to pay some medical bills.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

Ben does not recognize any gross income because the cash surrender value of a life insurance policy is not taxable if the insured is terminally ill. Henry, however, must recognize the $38,000 as gross income because he is in good health and the surrender value exceeds the premiums paid.

Ben Was Diagnosed with a Terminal Illness