When Betty was diagnosed as having a terminal illness, she sold her life insurance policy to Insurance Purchase, Inc, a company that is licensed to invest in these types of contracts. Betty sold the policy for $32,000 and Insurance Purchase, Inc, became the beneficiary. She had paid total premiums of $19,000 . Betty died 8 months after the sale. Insurance Purchase, Inc, collected $50,000 on the
policy. The company had paid additional premiums of $4,000 on the policy. Betty is not required to recognize a $13,000 gain from the sale of her life insurance policy and Insurance Purchase, Inc, is required to recognize a $14,000 gain from the insurance policy.
a. True
b. False
Indicate whether the statement is true or false
True
RATIONALE: Betty's gain is excluded from gross income because she was suffering from a terminal illness when she sold the policy. However, Insurance Purchase, Inc., purchased the policy and, therefore, is not eligible for the life insurance beneficiary's exclusion. Insurance Purchase, Inc., must report a gain of $14,000 ($50,000 – $32,000 – $4,000) because it purchased the policy.
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