Question

Daniella has a universal life (UL) insurance policy with a face value of $1,000,000. The net cost of pure insurance (NCPI) is $6,000 and Daniella pays annual premiums of $20,000. As a business owner and entrepreneur, Daniella owns a successful restaurant and would like to open another location to expand her business. In order to do so, she applies for a loan of $250,000 at her local bank. Subsequently, the bank approves Daniella’s loan, contingent upon the collateral assignment of her policy. What amount of her annual insurance premium can Daniella deduct as a business expense?

a) $1,500

b) $5,000

c) $6,000

d) $20,000

Answer 1

Sol:

NCPI = $6,000

Annual premium paid by Daniella = $20,000

Insurance FV (Death benefit) = $1,000,000

Bank loan = $250,000

NCPI of the term policy is $6,000 which is less than annual premium paid by Daniella. NCPI amount would be pro-rated based on the Bank loan outstanding throughout the year divided by death benefit of the insurance policy.

= $250,000 / $1,000,000 = 0.25

Now amount of her annual insurance premium Daniella can deduct as a business expense will be,

= $6000 x 0.25 = $1500

Therefore answer is a) $1500