Lindas husband dies naming her the sole beneficiary of a 500

Linda’s husband dies, naming her the sole beneficiary of a $500,000 life insurance policy. The insurance company informs her that she has two options: (1) she can receive the entire $500,000 in one lump-sum payment or (2) she can receive annual installments of $58,000 for 10 years

a. How much does Linda include in gross income if she takes the lump- sum payment?

b. How much does Linda include in gross income each year if she elects the installment payments?

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Solution

a). Answer :- Zero.

Explanation :- If Linda opts for lump-sum payment then nothing (zero amount) will be included in her gross income (for tax purposes) because in general, proceeds from life insurance are not taxable at all.

b). Answer :- Lind will include $ 8000 each year in her gross income.

Explanation :- Tax free income of Linda = 500000 * 58000 / (58000 * 10)

= 500000 * 58000 / 580000

= 500000 * 0.10

= $ 50,000

Accordingly, amount to be included in gross income of Linda each year (for tax purpose) = 58000 - 50000.

= $ 8,000.