Beneficiaries✓ Verified · outline & fact-checked · Sep 2026Difficulty 2/5
When life insurance proceeds are paid to the insured's estate rather than a named beneficiary, the income tax treatment of the proceeds is:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
The IRC Section 101(a) exclusion from gross income applies to life insurance proceeds paid by reason of the insured's death even when the estate is the recipient - the estate does not report the proceeds as income. However, designating the estate has significant drawbacks: the proceeds become probate assets, exposed to the insured's creditors and administration costs, and they are clearly included in the gross estate. Naming an individual or trust beneficiary generally keeps the proceeds out of probate while preserving the income tax exclusion.
Why the other options are wrong
- B) The income tax exclusion under Section 101(a) applies regardless of who receives the proceeds, including the estate.
- C) The exclusion is not limited to spouse recipients. Any beneficiary, including the estate, benefits from the income tax exclusion.
- D) No such insurance-specific excise tax exists on death proceeds. The proceeds are excluded from gross income.
Memory hook
The estate receives the money income-tax-free but also gets the probate bill and creditors.