Under IRC §101(a), the death benefit paid under a life insurance policy to a named beneficiary is generally:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
IRC §101(a) provides that proceeds of life insurance paid by reason of the insured's death are generally excluded from the beneficiary's gross income. This is the central tax advantage of life insurance: the death benefit passes income-tax free, providing immediate liquidity. If the benefit is received in installments, only the interest portion is taxable — the principal is still tax-free. Proceeds are not ordinary income, are not capital gains, and the insured's age at death does not change the exclusion. Exceptions exist for policies transferred for value, but the general rule is exclusion.
Why the other options are wrong
- B) Death proceeds are excluded from gross income under IRC §101(a); they are not taxed as ordinary income to the recipient of the death benefit.
- C) Capital-gain treatment applies to the sale or exchange of assets, not to life insurance death benefits received by a beneficiary.
- D) The insured's age at death does not affect the tax treatment of the proceeds. IRC §101(a) excludes the death benefit regardless of the insured's age.
Memory hook
Death benefits: income tax's one free lunch — IRC §101 keeps them out of the beneficiary's income.