Albert Had a Terminal Illness Which Required Almost Constant Nursing

Albert had a terminal illness which required almost constant nursing care for the remaining two years of his estimated life, according to his doctor. Albert had a life insurance policy with a face amount of $100,000. Albert had paid $25,000 of premiums on the policy. The insurance company has offered to pay him $80,000 to cancel the policy, although its cash surrender value was only $55,000. Albert accepted the $80,000. Albert used $15,000 to pay his medical expenses. Albert made a miraculous recovery and lived another 20 years. As a result of cashing in the policy:

A) Albert must recognize $55,000 of gross income, but he has $15,000 of deductible medical expenses.
B) Albert must recognize $65,000 ($80,000 - $15,000) of gross income.
C) Albert must recognize $40,000 ($80,000 - $25,000 - $15,000) of gross income.
D) Albert is not required to recognize any gross income because of his terminal illness.
E) None of these.

Correct Answer:

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