Question

1.     Billy Bob is the policyowner of an Option II (non-level death benefit) universal life policy with a face amount of $60,000. His wife, Betty Bob, is the insured. As of the date of Betty's death, the policy had an account value of $6,000; cumulative premiums paid of $5,000; and an outstanding policy loan balance of $3,000.

a.     Determine the death benefit proceeds payable to the beneficiary.

b.     How much of the death benefit proceeds would be considered taxable income to the beneficiary?

Answer 1

Billy Bob has chosen option II (non-level death benefit) UL policy, i.e. Universal Life Policy (UL) with Increasing Death benefit. Under this policy, the death benefit proceeds payable to the beneficiary is FACE AMOUNT + POLICY'S ACCOUNT VALUE.

A. In the given question, the policy face amount is $60000 and the account value is $ 6000. Thus, the death benefit proceeds to the beneficiary are $ 60000+$6000=$66,000. The further outstanding loan balance will be deducted from the death benefit proceeds.

Thus, the final figure of death benefit proceeds payable to Mr. Billy Bob is $63,000.

B. Death benefit proceeds received by the beneficiary is not counted as taxable income. Any interest earned on this death benefit proceeds by the beneficiary by not withdrawing the amount immediately on the death of the insurer and request the insurance company to withhold the death proceeds for some period of time. The amount of interest earned during that particular period on the death benefit proceeds shall be taxed in the hands of the beneficiary.

In the given question, total death benefit proceeds is non taxable for beneficiary.