Fuller was the owner and beneficiary of a $200,000 life
insurance policy on a parent. Fuller sold the policy to Decker, for
$25,000. Decker paid a total of $40,000 in premiums. Upon the
death of the parent, what amount must Decker include in gross
income?

(b) The requirement is to determine the amount of life
insurance proceeds that must be included in gross income by
Decker, on the death of Fuller’s parent. Life insurance proceeds
paid because of the insured person’s death are generally excluded
from gross income. However, the exclusion generally does not
apply if the insurance policy was obtained by the beneficiary in
exchange for valuable consideration from a person other than the
insurance company. Here, Decker purchased the policy from
Fuller for $25,000 and paid an additional $40,000 in premiums,
so Decker must include in gross income the excess of insurance
proceeds over his investment in the policy [$200,000 – ($25,000
+ $40,000) = $135,000.