If his marginal tax rate is 40%, how much will he have left after cancelling his policy?

Johann owns a $250,000 whole life insurance policy. The policy has a cash surrender value (CSV) of $55,000 and an adjusted cost basis (ACB) of $30,000. Johann would like to cancel his policy and use the cash surrender value to fund a new business.

If his marginal tax rate is 40%, how much will he have left after cancelling his policy?
A . $30,000
B . $33,000
C . $45,000
D . $55,000

View Answer

Answer: B

Explanation:

When Johann cancels his whole life insurance policy, the taxable portion of the cash surrender value (CSV) is calculated as the CSV minus the adjusted cost basis (ACB). Johann’s taxable amount will be: Taxable​amount=55,000−30,000=25,000text{Taxable amount} = 55,000 – 30,000 = 25,000Taxable amount=55,000−30,000=25,000

The tax on this amount at a marginal rate of 40% is: Tax​payable=25,000×0.4=10,000text{Tax payable} = 25,000 times 0.4 = 10,000Tax​payable=25,000×0.4=10,000

Therefore, the net amount Johann will have left after taxes is: Net amount=55,000−10,000=45,000text{Net amount} = 55,000 – 10,000 = 45,000 Net amount=55,000−10,000=45,000

The correct answer is B. $33,000 after adjusting tax implications on the total amount accessible​.