Life Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 1/5
How is a life insurance death benefit paid as a lump sum to a named beneficiary treated for federal income tax purposes?
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Under IRC §101(a), life insurance death proceeds paid in a lump sum to a beneficiary are excluded from the beneficiary's gross income and received income-tax free. This is one of the core tax advantages of life insurance. However, if the proceeds are paid in installments, the interest element of each payment is taxable, and the proceeds may be included in the insured's gross estate if the insured possessed incidents of ownership. The death benefit itself remains free of federal income tax.
Why the other options are wrong
- B) Death proceeds are not ordinary income to the beneficiary; they are excluded under IRC §101(a).
- C) Capital gain treatment applies to investments sold at a profit, not to death benefit payouts.
- D) Estate inclusion rules depend on incidents of ownership, not on whether the beneficiary is a spouse.
Memory hook
Death benefit = the tax-free gift of life insurance. Lump sum, no income tax.