A nonparticipating whole life insurance policy was surrendered for its $20,000 cash value. The total premiums paid had totaled $16,000. What were the federal income tax consequences to the policyowner on receipt of the cash value?
$16,000 was received as ordinary income and $4,000 as tax-free
$20,000 was received as a capital gain
$20,000 was received as ordinary income
$16,000 was received tax-free and $4,000 as ordinary income