An investor purchases an existing $500,000 life insurance policy from the original owner for $40,000 and continues to pay $5,000 in annual premiums until the insured dies five years later. The investor is NOT one of the exempt transferees listed in §101(a)(2). How much of the $500,000 death benefit is taxable to the investor as ordinary income?

Question

Accepted Answer

$435,000 — the amount that exceeds the $40,000 consideration plus $25,000 of subsequent premiums

Answer

$40,000 — only the purchase price is taxable, since premiums never enter the buyer's basis

Answer

$0 — the full death benefit stays income-tax-free under §101(a) despite the sale

Answer

$500,000 — the entire death benefit is taxable because the policy was sold for value to a non-exempt buyer

Explanation

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