John Rivera owns a $300,000 level-term policy which he purchased five years ago. He has paid premiums of $500/yr for the past five years. He also owns a $100,000 whole life policy which he purchased fifteen years ago. He has paid premiums of $2,000 per year for the past fifteen years, and now the policy has a cash surrender value of $40,000. Over the years, the whole life policy has paid cash dividends to John
John Rivera owns a $300,000 level-term policy which he purchased five years ago. He has paid premiums of $500/yr for the past five years. He also owns a $100,000 whole life policy which he purchased fifteen years ago. He has paid premiums of $2,000 per year for the past fifteen years, and now the policy has a cash surrender value of $40,000. Over the years, the whole life policy has paid cash dividends to John. The cumulative dividends paid to John since inception totals $5,000.
If John decides to cancel his $300,000 level-term policy, which of the following statements is true?
John has a taxable gain of $2,500
John has a taxable gain of $297,500
John would have no taxable gain.
John would have a taxable gain only if he died while the insurance was in force.
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