Joe is the beneficiary of a life insurance policy taken out by his father several years ago.

Question:

Joe is the beneficiary of a life insurance policy taken out by his father several years ago. Joe’s father dies, and Joe has the option of receiving the $100,000 face value of the policy in cash or receiving annual payments of $1,000 per month for the rest of his life. Joe is now 65. Joe’s father paid $32,000 in premiums over the years.
a. How much must Joe include in gross income this year if he accepts the $100,000 face amount?
b. Assume Joe elects to receive the annual payments. What is his life expectancy?
c. What is his annual exclusion?
d. How much must he report as income each year?

Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...