Chapter 4: Gross Income from Personal and Investment Activities

01.Core Concepts

• Death benefits paid by reason of the death of the insured are exempt from income tax. • Exception: Transfer-for-Value Rule • Distributions from regular in-force policies • First, treated as return of basis • Next, treated as a loan • Modified Endowment Contracts • LIFO basis: distributions taxable to extent of gain • Accelerated Death Benefits are excluded from gross income if: • Terminally Ill: death expected in 24 months, or • Chronically Ill: unable to perform 2 of 6 activities of daily living