Seymore named his wife, Penelope, the beneficiary of a $100,000 insurance policy on his life.The policy provided that, upon his death, the proceeds would be paid at a rate of $4,000 per year plus interest over a 25-year period.Seymore died June 25 of last year, and in the current year Penelope received a payment of $5,200 from the insurance company.What amount should she include in her gross income for the current year?

Question

Quizplus · Accepted Answer

Penelope should include in her gross income the portion of the $5,200 payment that represents interest income. The $4,000 portion of the payment is considered a return of Seymore's investment in the policy and is not taxable. The interest portion is $1,200 ($5,200 payment - $4,000 return of investment), which Penelope should include in her gross income for the current year.

Seymore Named His Wife, Penelope, the Beneficiary of a $100,000