Life Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 1/5
Under the Internal Revenue Code, proceeds paid as a lump sum under a life insurance policy upon the insured's death are generally:
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Answer & full 3-part explanation (select an option above, or peek)
Why D is correct
IRC Section 101(a) provides that life insurance death benefits paid in a lump sum are generally excluded from the beneficiary's gross income for federal income tax purposes. This income-tax-free treatment is one of the central advantages of life insurance and a key reason it is used in estate and business planning. If proceeds are instead paid out in installments, the interest element of each payment is taxable. Estate tax is a separate matter that can apply to very large estates, but it does not affect the income-tax exclusion of the death benefit.
Why the other options are wrong
- A) Ordinary-income taxation applies to the interest portion of installment payments, not to a lump-sum death benefit under Section 101.
- B) Death proceeds are not treated as capital gains; the Section 101 exclusion applies to the full principal amount paid at death.
- C) Estate tax may apply only when the deceased's total estate exceeds the applicable exclusion amount, not to every estate.
Memory hook
Death benefit in one check: income-tax-free. In installments, only the interest portion is taxed.