Seymour Thomas named his wife, Penelope, the beneficiary
of a $100,000 (face amount) insurance policy on his life. The
policy provided that upon his death, the proceeds would be paid
to Penelope with interest over her present life expectancy, which
was calculated at twenty-five years. Seymour died during 2013,
and Penelope received a payment of $5,200 from the insurance
company. What amount should she include in her gross income
for 2013?

(b) The requirement is to determine the amount of life
insurance payments to be included in a widow’s gross income.
Life insurance proceeds paid by reason of death are excluded
from income if paid in a lump sum or in installments. If the payments
are received in installments, the principal amount of the
policy divided by the number of annual payments is excluded
each year. Therefore, $1,200 of the $5,200 insurance payment is
included in Penelope’s gross income.

Annual installment $ 5,200

Principal amount ($100,000 ÷ 25) – 4,000

Gross income $ 1,200