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16 April, 10:19

Sam died on January 15, 2010 and left his wife, Terry, an insurance policy with a face value of $100,000. Terry elected to receive the proceeds over a 10-year period ($10,000 plus interest each year). This year Terry receives $11,500 ($10,000 proceeds plus $1,500 interest) from the insurance company. How much income must Terry report from this payment?

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  1. 16 April, 10:32
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    The $1,500 earned in interest

    Explanation:

    According to the IRS, proceeds from a life insurance policy are not included in the taxable income of the beneficiary. If Terry would have chosen to receive the $100,000 in a single payment, she wouldn't have to pay any taxes for that money. Since she decided to receive 10 annual payments plus interest, she must include the earned interest as taxable income.
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