Sidney, age 58, owns a deferred variable annuity that he purchased 15 years ago and into which he has paid $25,000 in the form of periodic premiums. Today its cash value is $37,000. If he dies today, which of the following statements best describes the tax treatment this transaction will receive?

A) Of the cash value, $25,000 is payable to the beneficiary income tax-free, $12,000 is subject to income taxation, and there is a penalty tax.
B) Of the cash value, $12,000 is payable to the beneficiary income tax-free and $25,000 is subject to income taxation.
C) Of the cash value, $25,000 is payable to the beneficiary income tax-free and $12,000 is subject to income taxation.
D) The full $37,000 is payable to the beneficiary income tax-free.

Ans: C) Of the cash value, $25,000 is payable to the beneficiary income tax-free and $12,000 is subject to income taxation.