Life Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 1/5
Under the federal income tax rules for life insurance, a death benefit paid as a lump sum to a beneficiary is generally treated as:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Under Internal Revenue Code Section 101(a), proceeds of life insurance payable by reason of the insured's death are generally excluded from the beneficiary's gross income. This tax-free treatment is one of the central advantages of life insurance. If the beneficiary chooses a settlement option that pays interest, the interest portion is taxable, but the death benefit itself remains tax-free.
Why the other options are wrong
- B) Lump-sum death proceeds are not ordinary income to the beneficiary under IRC Section 101(a).
- C) Death proceeds are not treated as a capital asset sale and are not taxed as capital gain.
- D) The proceeds may be included in the taxable estate in some large estates, but that is an estate tax question, not income taxation of the beneficiary.
Memory hook
Death benefit, lump sum, tax-free to the beneficiary. Interest paid on top is what the IRS may reach for.