Settlement of Life Insurance Policy. Sue is age 73 and has a
great deal of difficulty living independently as she suffers from severe
rheumatoid arthritis. She is covered by a $400,000 life insurance policy, and
her children are named as her beneficiaries. Because of her health, Sue decides
to live in a nursing home, but she does not have enough income to pay her
nursing home bills which are expected to total $42,000 per year. The insurance
company offers disabled individuals the option of either a reduced settlement
on their policies or an annuity. Given Sue’s age and health she has the option
of receiving $3,200 per month or a lump sum payment of $225,000. To date, Sue
has paid $80,000 in premiums on the policy.
a. How much income must Sue report if she chooses the lump
sum settlement?
b. How much income must Sue report if she elects the
annuity?
c. How much income would Sue have to report if her nursing
home bills amounted to only $36,000 per year?
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