Iris, a widow, elected to receive the proceeds of a $100,000 face value life ins

Question

Iris, a widow, elected to receive the proceeds of a $100,000 face value life insurance policy on the life of her deceased husband in annual installments of $12,500 over the remainder of her life, estimated to be 10 years. Which of the following is true? A) None of the payments received are included in gross income because their source is the life insurance policy. B) All of the payments are included in Iris’s gross income because she paid nothing for the right to receive the payments. C) Iris will not recognize income until the 9th year, after she has recovered her investment. D) Iris must include $2,500 in gross income each year for the first 10 years she collects on the policy.

Explanation / Answer

Iris must include $2,500 in gross income each year for the first 10 years she collects on the policy. Option D is correct (125000-100000)/10 = $2500

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