Life insurance death proceeds received by a beneficiary in a lump sum are generally:

Why A is correct

Under IRC §101(a), life insurance death proceeds paid in a lump sum to a named beneficiary are generally excluded from the beneficiary's gross income for federal income tax purposes. This tax-free treatment is a cornerstone of life insurance planning. If proceeds are received under a settlement option, however, the interest element is taxable. Premiums paid by the policyowner are generally not deductible, and the proceeds are not subject to Social Security or capital gains treatment. The exclusion encourages using life insurance to create an immediate, tax-free estate for survivors.

Why the other options are wrong

• B) Lump-sum death proceeds are not taxed as ordinary income; the exclusion applies at the beneficiary level. IRC §101(a) protects the lump-sum payment from income taxation entirely, so the death benefit arrives free of income tax in most cases.
• C) Death proceeds are not a capital gain, because no gain is recognized on the policy at death. The transfer at death is not treated as a taxable sale or exchange.
• D) Death benefits are not subject to Social Security (FICA) tax, which applies to wages and self-employment income. Insurance proceeds are not wages and lie outside the FICA tax base.

Memory hook

Death proceeds in one check = tax-free handshake under IRC §101.