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Iris collected life insurance: how much, if any, must she include in gross income?

Iris collected $100,000 on her deceased husband's life insurance policy. The policy was purchased by the husband's employer under a group policy. Iris'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 Iris's gross income.
b) The first 8 payments are a return of her capital and thus Iris is not required to recognize any income from the policy until she receives the ninth payment.
c) For each $12,500 payment that Iris receives, she can exclude $10,000 ($100,000/$125,000 ´ $12,500) from gross income.
d) For each $12,500 that Iris receives, she can exclude from gross income $500 ($5,000/$125,000 ´ $12,500).
e) None of the above.

Solution Preview

C. For each $12,500 payment that Iris receives, she can exclude $10,000 ($100,000/$125,000 ...

Solution Summary

Of the options presented for how much Iris should include in gross income, or how much can she exclude, the solution explanations the answer including some calculations.

$2.19