Archibald surrenders a life insurance policy and receives a lump-sum cash payment of $32,000. His premium payments up to the time of surrender amounted to $26,000. How is the surrender treated for tax purposes?
A) Archibald will receive $6,000 tax-free and will be taxed on his $26,000 cost basis.
B) The full $32,000 is received tax-free.
C) The full $32,000 is taxable as ordinary income.
D) Archibald will receive his $26,000 cost basis tax-free and will be taxed on $6,000.
Ans: D) Archibald will receive his $26,000 cost basis tax-free and will be taxed on $6,000.
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