34. 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?
Answer: A
The policyowner’s cost basis in this life insurance contract is $15,000.
The cost basis of a whole life insurance policy is determined by the total amount of premiums paid into the policy. In this case, the individual has paid $15,000 in premiums, which constitutes their cost basis.
A) $15,000
This option is correct because the cost basis of a life insurance policy is equal to the total premiums paid by the policyowner. Since the individual has paid $15,000 in premiums, this amount represents the cost basis in the life insurance contract.
B) $35,000
This option is incorrect as it does not reflect the total premiums paid. The idea of a cost basis is strictly related to the amount of money the policyowner has invested in the policy, which is $15,000, not $35,000.
C) $50,000
This option is also incorrect. The figure of $50,000 represents the face value of the policy, not the cost basis. The cost basis is strictly the amount of premiums paid, which is $15,000.
D) $65,000
This option is incorrect because it exceeds the total amount of premiums paid. The cost basis cannot exceed the total contributions made by the policyowner, which in this case totals $15,000.
Conclusion
The correct answer is $15,000, as it accurately represents the total amount of premiums the policyowner has paid into the whole life insurance policy. All other options misrepresent the relationship between premiums paid and the cost basis, as they either exceed or do not reflect the actual premiums contributed.