An individual purchased a $50,000 whole life policy in 1988 and has paid $15,000 in premiums. What is the policyowner’s cost basis in this life insurance contract?

Rationale

$15,000

The policyowner's cost basis in a whole life insurance contract is defined as the total amount of premiums paid into the policy. In this case, the individual has paid $15,000 in premiums, which represents their investment in the policy.

A ($15,000) CORRECT

This amount reflects the total premiums paid into the whole life policy. The cost basis is established by the sum of all premiums the policyholder has contributed over time, which in this case is $15,000.

B ($35,000) YOUR ANSWER

This figure inaccurately suggests that the cost basis includes additional amounts beyond the premiums paid. The cost basis is strictly limited to the total premiums, and there have been no additional payments or investments made by the policyholder.

C ($50,000) YOUR ANSWER

This amount represents the face value of the whole life policy, not the cost basis. The face value indicates the death benefit payable upon the insured’s death, but it does not reflect the policyholder’s financial contribution or investment in the policy.

D ($65,000) YOUR ANSWER

This figure is incorrect as it exceeds the total premiums paid by the policyowner. The cost basis cannot exceed the amount contributed through premiums, which in this case is $15,000.

Conclusion

In summary, the cost basis for the whole life insurance policy is determined solely by the total premiums paid by the policyholder. Here, with $15,000 paid in premiums, the cost basis remains $15,000. Understanding the cost basis is crucial for tax implications regarding any cash value or death benefit received from the policy.

An individual purchased a $50,000 whole life policy in 1988 and has paid $15,000 in premiums. What is the policyowner’s cost basis in this life insurance contract?

$15,000

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