Larry purchased an annuity from an insurance company that promises to pay him $10,000 per month for the rest of his life. Larry paid $1,051,200 for the annuity. Larry is in good health, and he is 72 years old. Larry received the first annuity payment of $10,000 this month. Use the expected number of payments in Exhibit 5-1 for this problem.

a. How much of the first payment should Larry include in gross income
b. If Larry lives more than 15 years after purchasing tha annuity, how much of each additional payment should he include in gross income?

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Limosa Limosa · Answer 1 · 2019-10-10T07:41:17+02:00

Answer:

The age of Larry is 72.

The expected return multiple is 14.4.

•Expected Value = 14.4 x 12 (pmts/yr) x 10,00 = 1,728,000

•Original / Expected = 1,051,200 / •1,728,000 = 61%

•First Pmt = 10,000

•Exclusion = 10,000 x 61% = 6,100

•Gross Income = 10,000 - 6,100 = 3,900

•100 x 10,000 x 61% = 610,000 capital recovered

•1,051,200- 610,000 = 441,200

deduction in year of death to recover remaining capital

Explanation:

The age of Larry is 72 and insurance company promise to pay $10,000 per month to Larry

First payment of Larry = $10,000

Larry paid for annuity = $1,051,200

Answer is there