A whole life policy matures as an endowment while the insured is still living, and the insurer pays the face amount to the policyowner. For federal income tax purposes, this payment is treated as:

Why C is correct

When a policy matures by endowment (the insured is alive at the maturity date), the proceeds are not paid by reason of death, so the IRC §101(a) death-benefit exclusion does not apply. Instead, under IRC §72(e), the amount received is taxable to the extent it exceeds the policyowner's investment in the contract (cost basis). The basis is recovered tax-free and the excess is ordinary income, mirroring the treatment of a surrender. Because the insured survived to maturity, the payment is an accumulation payout, not a death claim.

Why the other options are wrong

• A) The payment is not fully taxable; the owner first recovers the cost basis tax-free, so only the excess over basis is included in income. Part of the payout remains tax-free.
• B) Endowment proceeds are ordinary income to the extent of gain, not capital gain, and the basis is recovered before any tax is computed. Capital gain treatment is incorrect. Ordinary income is the correct label.
• D) The death-benefit exclusion under §101(a) requires payment by reason of the insured's death; an endowment paid while the insured lives is taxed like a surrender. A living maturity is not a death claim.

Memory hook

Endowment is not a death claim — you lived, so only the gain over your basis is taxed.