Under IRC Section 101, the death benefit paid under a life insurance policy in a lump sum to a named beneficiary is generally treated for federal income tax purposes as:

Why A is correct

Under IRC Section 101(a), life insurance death benefits paid by reason of the insured's death are generally excludable from the beneficiary's gross income. This is one of the central tax advantages of life insurance. If the proceeds are paid in installments, only the interest portion is taxable; the death benefit component remains tax-free. Estate tax may still apply depending on the size of the estate.

Why the other options are wrong

• B) The death benefit is not ordinary income to the beneficiary; it is excluded under Section 101.
• C) Life insurance proceeds are not treated as capital gain; they are entirely excluded, not taxed at capital-gain rates.
• D) No penalty tax applies to lump-sum death benefits; the 10% penalty is associated with early distributions from qualified plans or MECs.

Memory hook

Death benefit = tax-free money at the worst time. Section 101 keeps the beneficiary's hands clean.