Question

Eve purchases a whole life insurance policy in 1981, and now wants to reduce the amount of coverage from $400,000 to $200,000 as her needs have changed. Her policy has a CSV of $220,000 and an ACB of $70,000. Given that her marginal tax rate is 35% how much tax will she be charged as a result of reducing her coverage?

Answer 1

When Eve reduces her whole life insurance coverage, she will be charged $52,500 in tax due to the taxable gain on the policy. This is calculated by multiplying the taxable gain of $150,000 by her marginal tax rate of 35%.

Step-by-step explanation:

When Eve reduces her coverage from $400,000 to $200,000, the difference between the CSV and ACB (cash surrender value and adjusted cost basis) is considered a taxable gain. In this case, the taxable gain is $150,000 ($220,000 CSV - $70,000 ACB). Since her marginal tax rate is 35%, she will be charged 35% tax on the taxable gain of $150,000

The tax she will be charged is calculated by multiplying the taxable gain by the marginal tax rate: $150,000 * 0.35 = $52,500.

Therefore, Eve will be charged $52,500 in tax as a result of reducing her coverage.