Life Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 1/5
A beneficiary receives a life insurance death benefit in a single lump-sum payment. Under the Internal Revenue Code, the proceeds are generally:
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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), life insurance death proceeds paid in a lump sum are generally excluded from the beneficiary's gross income — the proceeds are received free of federal income tax. This tax-favored treatment is one of the core advantages of life insurance. The rule changes for installment settlements: if the proceeds are left with the insurer and paid in installments, the principal portion remains tax-free but the interest element is taxable as ordinary income as it is received.
Why the other options are wrong
- B) The lump-sum death proceeds are not taxed as ordinary income in full. Internal Revenue Code Section 101(a) excludes the death benefit from the beneficiary’s gross income.
- C) Death proceeds are not capital gains. Capital gain treatment is irrelevant to a contract payout on death, which is excluded from income under Section 101(a).
- D) No mandatory 25 percent withholding applies to life insurance death proceeds paid to a beneficiary. The proceeds are paid to the beneficiary without federal income tax withholding.
Memory hook
Death benefit = the tax-free gift. IRC Section 101 keeps the lump sum out of the beneficiary's income.