Life Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 1/5
Life insurance death proceeds paid in a lump sum to a beneficiary are generally:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Under IRC Section 101(a), life insurance death benefits paid in a lump sum are generally excluded from the beneficiary's gross income. The exclusion applies whether the policy is personally owned or employer-owned, subject to specific exceptions. If the proceeds are instead paid in installments, the interest portion of each installment is taxable; only the principal amount remains excluded.
Why the other options are wrong
- B) Death proceeds are not ordinary income; the Section 101(a) exclusion protects the principal from income tax.
- C) The proceeds are not a capital asset sale, so there is no capital gain treatment.
- D) There is no flat federal withholding tax applied to life insurance death benefits.
Memory hook
Death benefit in a lump sum = tax-free money to the beneficiary. Interest on installments? Taxable.