[brianboy]

Malva collected $100,000 on her deceased husband's life insurance policy. The policy was purchased by the husband's employer under a group policy. Malva's husband had included $5,000 in gross income from the group term life insurance premiums during the years he worked for the employer. She elected to collect the policy in 10 equal annual payments of $12,500 each.

a. None of the payments must be included in Malva's gross income.

b. The first 8 payments are a return of her capital and thus Malva is not required to recognize any income from the policy until she receives the ninth payment.

c. For each $12,500 payment that Malva receives, she can exclude $10,000 ($100,000/$125,000 x $12,500) from gross income.

d. For each $12,500 that Malva receives, she can exclude from gross income $500 ($5,000/$125,000 x $12,500).

e. None of the above.

I know that the life insurance itself is not taxable. I just don't know how the interest earned on the life insurance, when divided into equal payments, would be taxed. Thanks in advance.

[twinkiedooter]

This is obviously a homework question...

[twinkiedooter]

The answer is

a. as any income from insurance proceeds is considered tax free money. The money is taxed only if it is invested and a profit is reaped.