Sixteen years ago, Ms. Cole purchased a $500,000 insurance policy on her own life and named her son as sole beneficiary. She has paid $31,280 total premiums to keep this policy in force.
a. This year, she liquidates the policy for its $38,500 cash surrender value. Does she recognize any income on the liquidation?
b. Now assume that Ms. Cole is terminally ill. The insurance policy provides that a person with a life expectancy of less than one year can liquidate the policy and receive 80 percent of the death benefit. She does so and receives a $400,000 accelerated death benefit. Does she recognize any income on the liquidation?